UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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☒ |
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2019
or
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☐ |
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: 000-11688
US ECOLOGY, INC.
(Exact name of registrant as specified in its charter)
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Delaware |
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95-3889638 |
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(State or other jurisdiction of incorporation or |
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(I.R.S. Employer Identification No.) |
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organization) |
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101 S. Capitol Blvd., Suite 1000 |
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Boise, Idaho |
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83702 |
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(Address of principal executive offices) |
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(Zip Code) |
Registrant’s telephone number, including area code: (208) 331-8400
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class |
Trading Symbol(s) |
Name of each exchange on which registered |
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Common Stock, par value $0.01 per share |
ECOL |
Nasdaq Global Select Market |
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Warrants to Purchase Common Stock |
ECOLW |
Nasdaq Global Select Market |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ⌧ No ◻
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ⌧ No ◻
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large Accelerated Filer ⌧ |
Accelerated Filer ◻ |
Non-Accelerated Filer ◻ |
Smaller Reporting Company ☐ |
Emerging Growth Company ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
At October 29, 2019, there were 22,093,904 shares of the registrant’s Common Stock outstanding.
US ECOLOGY, INC.
FORM 10-Q
TABLE OF CONTENTS
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3 |
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Consolidated Balance Sheets as of September 30, 2019 and December 31, 2018 |
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4 |
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5 |
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Consolidated Statements of Cash Flows for the nine months ended September 30, 2019 and 2018 |
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6 |
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7 |
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31 |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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32 |
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48 |
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49 |
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52 |
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53 |
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54 |
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2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
US ECOLOGY, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except par value amount)
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September 30, 2019 |
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December 31, 2018 |
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Assets |
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Current Assets: |
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Cash and cash equivalents |
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$ |
21,074 |
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$ |
31,969 |
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Receivables, net |
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155,826 |
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144,690 |
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Prepaid expenses and other current assets |
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16,014 |
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10,938 |
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Income taxes receivable |
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4,786 |
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7,071 |
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Total current assets |
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197,700 |
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194,668 |
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Property and equipment, net |
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273,781 |
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258,443 |
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Operating lease assets |
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17,496 |
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— |
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Restricted cash and investments |
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5,045 |
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4,941 |
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Intangible assets, net |
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275,983 |
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279,666 |
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Goodwill |
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219,181 |
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207,177 |
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Other assets |
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10,963 |
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3,003 |
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Total assets |
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$ |
1,000,149 |
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$ |
947,898 |
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Liabilities and Stockholders’ Equity |
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Current Liabilities: |
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Accounts payable |
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$ |
23,162 |
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$ |
17,754 |
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Deferred revenue |
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12,278 |
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10,451 |
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Accrued liabilities |
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33,369 |
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35,524 |
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Accrued salaries and benefits |
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19,469 |
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16,732 |
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Income taxes payable |
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275 |
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505 |
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Short-term borrowings |
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1,535 |
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— |
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Current portion of closure and post-closure obligations |
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2,196 |
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2,266 |
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Current portion of operating lease liabilities |
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4,914 |
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— |
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Total current liabilities |
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97,198 |
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83,232 |
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Long-term debt |
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354,000 |
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364,000 |
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Long-term closure and post-closure obligations |
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78,203 |
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76,097 |
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Long-term operating lease liabilities |
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12,590 |
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— |
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Other long-term liabilities |
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3,792 |
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2,146 |
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Deferred income taxes, net |
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68,399 |
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63,206 |
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Total liabilities |
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614,182 |
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588,681 |
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Commitments and contingencies |
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Stockholders’ Equity: |
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Common stock $0.01 par value, 50,000 authorized; 22,094 and 22,040 shares issued and outstanding, respectively |
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221 |
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220 |
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Additional paid-in capital |
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185,940 |
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183,834 |
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Retained earnings |
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214,013 |
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189,324 |
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Treasury stock, at cost, 13 and 8 shares, respectively |
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(772) |
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(370) |
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Accumulated other comprehensive loss |
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(13,435) |
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(13,791) |
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Total stockholders’ equity |
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385,967 |
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359,217 |
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Total liabilities and stockholders’ equity |
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$ |
1,000,149 |
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$ |
947,898 |
The accompanying notes are an integral part of these consolidated financial statements.
3
US ECOLOGY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share amounts)
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Three Months Ended September 30, |
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Nine Months Ended September 30, |
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2019 |
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2018 |
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2019 |
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2018 |
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Revenue |
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$ |
167,402 |
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$ |
151,416 |
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$ |
454,241 |
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$ |
408,387 |
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Direct operating costs |
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110,862 |
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104,116 |
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312,877 |
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283,968 |
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Gross profit |
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56,540 |
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47,300 |
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141,364 |
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124,419 |
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Selling, general and administrative expenses |
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33,329 |
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23,649 |
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77,683 |
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67,037 |
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Impairment charges |
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— |
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3,666 |
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— |
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3,666 |
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Operating income |
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23,211 |
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19,985 |
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63,681 |
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53,716 |
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Other income (expense): |
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Interest income |
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158 |
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34 |
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567 |
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97 |
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Interest expense |
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(3,891) |
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(3,066) |
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(11,509) |
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(8,782) |
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Foreign currency loss |
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(90) |
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(303) |
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(613) |
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(456) |
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Other |
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110 |
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177 |
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342 |
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2,493 |
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Total other expense |
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(3,713) |
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(3,158) |
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(11,213) |
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(6,648) |
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Income before income taxes |
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19,498 |
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16,827 |
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52,468 |
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47,068 |
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Income tax expense |
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6,428 |
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3,400 |
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|
15,864 |
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|
11,178 |
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Net income |
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$ |
13,070 |
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$ |
13,427 |
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$ |
36,604 |
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$ |
35,890 |
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Earnings per share: |
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Basic |
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$ |
0.59 |
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$ |
0.61 |
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$ |
1.66 |
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$ |
1.64 |
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Diluted |
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$ |
0.59 |
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$ |
0.61 |
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$ |
1.65 |
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$ |
1.63 |
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Shares used in earnings per share calculation: |
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Basic |
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22,013 |
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21,928 |
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22,002 |
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21,866 |
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Diluted |
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22,231 |
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22,099 |
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22,212 |
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22,027 |
The accompanying notes are an integral part of these consolidated financial statements.
4
US ECOLOGY, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(In thousands)
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Three Months Ended September 30, |
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Nine Months Ended September 30, |
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2019 |
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2018 |
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2019 |
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2018 |
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Net income |
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$ |
13,070 |
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$ |
13,427 |
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$ |
36,604 |
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$ |
35,890 |
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Other comprehensive income (loss): |
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Foreign currency translation gain (loss) |
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(995) |
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1,590 |
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2,374 |
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(1,878) |
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Net changes in interest rate hedge, net of taxes of $(40), $114, $(537) and $706, respectively |
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(150) |
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428 |
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(2,018) |
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2,651 |
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Comprehensive income, net of tax |
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$ |
11,925 |
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$ |
15,445 |
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$ |
36,960 |
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$ |
36,663 |
The accompanying notes are an integral part of these consolidated financial statements.
5
US ECOLOGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
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Nine Months Ended September 30, |
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2019 |
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2018 |
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Cash flows from operating activities: |
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Net income |
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$ |
36,604 |
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$ |
35,890 |
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Adjustments to reconcile net income to net cash provided by operating activities: |
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Depreciation and amortization of property and equipment |
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26,656 |
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20,991 |
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Amortization of intangible assets |
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8,600 |
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|
6,925 |
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Accretion of closure and post-closure obligations |
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|
3,397 |
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|
3,242 |
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Property and equipment impairment charges |
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25 |
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— |
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Goodwill and intangible asset impairment charges |
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— |
|
|
3,666 |
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Unrealized foreign currency loss (gain) |
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(361) |
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|
899 |
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Deferred income taxes |
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|
3,873 |
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|
4,730 |
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Share-based compensation expense |
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|
3,713 |
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|
3,272 |
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Unrecognized tax benefits |
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(238) |
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|
674 |
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Net loss (gain) on disposition of assets |
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|
665 |
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(57) |
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Gain on insurance proceeds from damaged property and equipment |
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(9,651) |
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— |
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Amortization of debt issuance costs |
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|
613 |
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|
607 |
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Changes in assets and liabilities (net of effects of business acquisitions): |
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Receivables |
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(9,449) |
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|
(27,573) |
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Income taxes receivable |
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|
2,292 |
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(7,878) |
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Other assets |
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(7,206) |
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|
(2,355) |
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Accounts payable and accrued liabilities |
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|
1,873 |
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|
11,218 |
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Deferred revenue |
|
|
1,770 |
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|
3,579 |
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Accrued salaries and benefits |
|
|
2,665 |
|
|
1,576 |
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Income taxes payable |
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(425) |
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|
(2,884) |
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Closure and post-closure obligations |
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(1,414) |
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|
(1,026) |
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Net cash provided by operating activities |
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|
64,002 |
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|
55,496 |
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Cash flows from investing activities: |
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Purchases of property and equipment |
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(38,443) |
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(25,791) |
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Business acquisitions (net of cash acquired) |
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(17,851) |
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(21,253) |
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Insurance proceeds from damaged property and equipment |
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|
10,000 |
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— |
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Minority interest investment |
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(7,870) |
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— |
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Proceeds from sale of property and equipment |
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|
549 |
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|
307 |
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Purchases of restricted investments |
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(798) |
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|
(673) |
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Proceeds from sale of restricted investments |
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|
751 |
|
|
583 |
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Net cash used in investing activities |
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|
(53,662) |
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|
(46,827) |
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|
|
|
|
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|
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Cash flows from financing activities: |
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|
|
|
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Proceeds from long-term debt |
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20,000 |
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— |
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Payments on long-term debt |
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(30,000) |
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|
— |
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Payments on short-term borrowings |
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(51,018) |
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|
— |
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Proceeds from short-term borrowings |
|
|
52,553 |
|
|
— |
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Dividends paid |
|
|
(11,915) |
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|
(11,838) |
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Payment of equipment financing obligations |
|
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(619) |
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(326) |
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Proceeds from exercise of stock options |
|
|
63 |
|
|
2,427 |
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Other |
|
|
(915) |
|
|
(314) |
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Net cash used in financing activities |
|
|
(21,851) |
|
|
(10,051) |
|
|
|
|
|
|
|
|
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Effect of foreign exchange rate changes on cash |
|
|
673 |
|
|
(578) |
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|
|
|
|
|
|
|
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Decrease in Cash and cash equivalents and restricted cash |
|
|
(10,838) |
|
|
(1,960) |
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Cash and cash equivalents and restricted cash at beginning of period |
|
|
32,753 |
|
|
28,799 |
|
Cash and cash equivalents and restricted cash at end of period |
|
$ |
21,915 |
|
$ |
26,839 |
|
|
|
|
|
|
|
|
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Reconciliation of Cash and cash equivalents and restricted cash |
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of period |
|
|
31,969 |
|
|
27,042 |
|
Restricted cash at beginning of period |
|
|
784 |
|
|
1,757 |
|
Cash and cash equivalents and restricted cash at beginning of period |
|
$ |
32,753 |
|
$ |
28,799 |
|
Cash and cash equivalents at end of period |
|
|
21,074 |
|
|
26,076 |
|
Restricted cash at end of period |
|
|
841 |
|
|
763 |
|
Cash and cash equivalents and restricted cash at end of period |
|
$ |
21,915 |
|
$ |
26,839 |
|
Supplemental Disclosures: |
|
|
|
|
|
|
|
Income taxes paid, net of receipts |
|
$ |
10,422 |
|
$ |
17,842 |
|
Interest paid |
|
$ |
10,340 |
|
$ |
8,001 |
|
Non-cash investing and financing activities: |
|
|
|
|
|
|
|
Capital expenditures in accounts payable |
|
$ |
558 |
|
$ |
2,684 |
|
Restricted stock issued from treasury shares |
|
$ |
514 |
|
$ |
11 |
The accompanying notes are an integral part of these consolidated financial statements.
6
US ECOLOGY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
||||||||
|
|
|
2019 |
|
2018 |
|
2019 |
|
2018 |
||||
|
Total stockholders' equity, beginning balances |
|
$ |
376,759 |
|
$ |
340,300 |
|
$ |
359,217 |
|
$ |
324,077 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balances |
|
$ |
221 |
|
$ |
220 |
|
$ |
220 |
|
$ |
218 |
|
Stock option exercises and issuance of common stock and restricted common stock |
|
|
— |
|
|
— |
|
|
1 |
|
|
2 |
|
Ending balances |
|
$ |
221 |
|
$ |
220 |
|
$ |
221 |
|
$ |
220 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional paid-in capital: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balances |
|
$ |
184,747 |
|
$ |
180,687 |
|
$ |
183,834 |
|
$ |
177,498 |
|
Share-based compensation |
|
|
1,246 |
|
|
1,193 |
|
|
3,713 |
|
|
3,272 |
|
Stock option exercises and issuance of common stock and restricted common stock |
|
|
10 |
|
|
857 |
|
|
(1,093) |
|
|
1,978 |
|
Issuance of restricted common stock from treasury shares |
|
|
(63) |
|
|
— |
|
|
(514) |
|
|
(11) |
|
Ending balances |
|
$ |
185,940 |
|
$ |
182,737 |
|
$ |
185,940 |
|
$ |
182,737 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained earnings: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balances |
|
$ |
204,916 |
|
$ |
170,112 |
|
$ |
189,324 |
|
$ |
155,533 |
|
Net income |
|
|
13,070 |
|
|
13,427 |
|
|
36,604 |
|
|
35,890 |
|
Dividends paid |
|
|
(3,973) |
|
|
(3,954) |
|
|
(11,915) |
|
|
(11,838) |
|
Ending balances |
|
$ |
214,013 |
|
$ |
179,585 |
|
$ |
214,013 |
|
$ |
179,585 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury stock: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balances |
|
$ |
(835) |
|
$ |
(370) |
|
$ |
(370) |
|
$ |
(68) |
|
Repurchase of common stock |
|
|
— |
|
|
— |
|
|
(916) |
|
|
(313) |
|
Issuance of restricted common stock from treasury shares |
|
|
63 |
|
|
— |
|
|
514 |
|
|
11 |
|
Ending balances |
|
$ |
(772) |
|
$ |
(370) |
|
$ |
(772) |
|
$ |
(370) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balances |
|
$ |
(12,290) |
|
$ |
(10,349) |
|
$ |
(13,791) |
|
$ |
(9,104) |
|
Other comprehensive income (loss) |
|
|
(1,145) |
|
|
2,018 |
|
|
356 |
|
|
773 |
|
Ending balances |
|
$ |
(13,435) |
|
$ |
(8,331) |
|
$ |
(13,435) |
|
$ |
(8,331) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders' equity, ending balances |
|
$ |
385,967 |
|
$ |
353,841 |
|
$ |
385,967 |
|
$ |
353,841 |
The accompanying notes are an integral part of these consolidated financial statements.
7
US ECOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. GENERAL
Basis of Presentation
The accompanying unaudited consolidated financial statements include the results of operations, financial position and cash flows of US Ecology, Inc. and its wholly-owned subsidiaries. All inter-company balances have been eliminated. Throughout these consolidated financial statements words such as “we,” “us,” “our,” “US Ecology” and “the Company” refer to US Ecology, Inc. and its subsidiaries.
In the opinion of management, the accompanying unaudited consolidated financial statements include all adjustments (consisting only of normal recurring adjustments) necessary to present fairly, in all material respects, the results of the Company for the periods presented. These consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) have been omitted pursuant to the rules and regulations of the SEC. These consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018. The results of operations for the three and nine months ended September 30, 2019 are not necessarily indicative of the results to be expected for the entire year ending December 31, 2019.
The Company’s consolidated balance sheet as of December 31, 2018 has been derived from the Company’s audited consolidated balance sheet as of that date.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenue and expenses during the reporting period. Actual results could differ materially from the estimates and assumptions that we use in the preparation of our consolidated financial statements. As it relates to estimates and assumptions in amortization rates and environmental obligations, significant engineering, operations and accounting judgments are required. We review these estimates and assumptions no less than annually. In many circumstances, the ultimate outcome of these estimates and assumptions will not be known for decades into the future. Actual results could differ materially from these estimates and assumptions due to changes in applicable regulations, changes in future operational plans and inherent imprecision associated with estimating environmental impacts far into the future.
Recently Issued Accounting Pronouncements
In August 2018, the SEC adopted the final rule under SEC Release No. 33-10532, “Disclosure Update and Simplification,” adopting amendments to certain disclosure rules that were redundant, duplicative, overlapping, outdated, or superseded, in light of other SEC disclosure requirements, GAAP or changes in the information environment. In addition, the amendments expanded the disclosure requirements relating to the analysis of equity for interim financial statements. Under the amendments, an analysis of the changes in each caption of shareholders’ equity and noncontrolling interests presented in the balance sheet must be provided in a note or separate statement. The analysis must present a reconciliation of the beginning balance to the ending balance of each period for which a statement of earnings is required to be filed. The final rule was effective on November 5, 2018. The Company adopted the final rule effective for the first quarter of 2019. The adoption of the final rule did not have an impact on the Company’s consolidated financial position or results of operations.
In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815). This ASU amends the guidance in ASC 815 to better align an entity’s risk management activities and financial reporting for hedging relationships
8
through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. The guidance is effective for annual and interim reporting periods beginning after December 15, 2018, with early adoption permitted. The Company adopted ASU 2017-12 on January 1, 2019 and the standard did not have a material impact on its consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The ASU significantly changes the accounting model used by lessees to account for leases, requiring that all material leases be presented on the balance sheet. Lessees will recognize substantially all leases on the balance sheet as a right-of-use asset and a corresponding lease liability. The Company adopted ASU 2016-02 on January 1, 2019 utilizing the modified retrospective transition method and elected not to recast comparative periods. We elected the package of practical expedients, which allows the Company not to reassess (1) whether any expired or existing contracts as of the adoption date are or contain a lease, (2) lease classification for any expired or existing leases as of the adoption date and (3) initial direct costs for any existing leases as of the adoption date. We also elected the practical expedient related to land easements, allowing us to carry forward our accounting treatment for land easements on existing agreements. The Company did not elect to apply the hindsight practical expedient when determining lease term and assessing impairment of right-of-use assets.
Adoption of ASU 2016-02 resulted in the recognition of right-of-use assets and lease liabilities for operating leases of $18.1 million on its consolidated balance sheet as of March 31, 2019, with no material impact on its consolidated statement of stockholders’ equity or consolidated statements of operations. See Note 9 for additional information and disclosure on our leases.
NRCG Merger
On June 23, 2019, US Ecology, Inc. entered into an Agreement and Plan of Merger (the “Merger Agreement”) with NRC Group Holdings Corp., a Delaware corporation (“NRCG”), US Ecology Holdings, Inc. (f/k/a US Ecology, Inc.) (“Predecessor US Ecology”), Rooster Merger Sub, Inc., a Delaware corporation (“NRCG Merger Sub”), and ECOL Merger Sub, Inc., a Delaware corporation (“ECOL Merger Sub”).
On November 1, 2019, pursuant to and subject to the conditions set forth in the Merger Agreement, ECOL Merger Sub merged with and into US Ecology Holdings, Inc. (“Predecessor US Ecology”) (the “ECOL Merger”), with Predecessor US Ecology continuing as the surviving company and as a wholly-owned subsidiary of the Company. Substantially concurrently therewith, NRCG Merger Sub merged with and into NRCG (the “NRCG Merger,” and, together with the ECOL Merger, the “Mergers”), with NRCG continuing as the surviving company and as a wholly-owned subsidiary of the Company. Following the completion of the Mergers, the Company contributed all of the issued and outstanding equity interests of NRCG to Predecessor US Ecology so that, after such contribution, NRCG became a wholly-owned subsidiary of Predecessor US Ecology.
In the ECOL Merger, each share of common stock, par value $0.01 per share, of Predecessor US Ecology (“Predecessor US Ecology Common Stock”) issued and outstanding immediately prior to the Effective Time (other than cancelled shares) was converted into one share of common stock, par value $0.01 per share, of the Company (“Company Common Stock”). Each share of Predecessor US Ecology Common Stock that was held by Predecessor US Ecology as treasury stock or that was owned by Predecessor US Ecology, ECOL Merger Sub, or any other subsidiary of the Company, immediately prior to the effective time of the Mergers (the “Effective Time”) ceased to be outstanding and was cancelled and ceased to exist, and no consideration was delivered in exchange therefor. At the Effective Time, outstanding equity awards of Predecessor US Ecology were automatically assumed by the Company and converted into equity awards of the Company on a one-for-one basis as set forth in the Merger Agreement.
In the NRCG Merger, each share of common stock, par value $0.0001 per share, of NRCG (“NRCG Common Stock”) issued and outstanding immediately prior to the Effective Time (other than cancelled shares) was converted into: (1) 0.196 (the “NRCG Exchange Ratio”) of a share of Company Common Stock, (2) cash in lieu of fractional shares of Company Common Stock payable pursuant to the Merger Agreement and (3) any dividends or other distributions to which the holder thereof became entitled to upon the surrender of such shares of NRCG Common Stock in accordance with the Merger Agreement. Outstanding shares of NRCG equity awards were converted into equity awards of the Company pursuant to the mechanics set forth in the Merger Agreement. In the NRCG Merger, each share of NRCG Common Stock that was
9
held by NRCG as treasury stock or that is owned by NRCG, NRCG Merger Sub or any other subsidiary of Predecessor US Ecology or NRCG immediately prior to the Effective Time ceased to be outstanding and was cancelled and ceased to exist, and no consideration was delivered in exchange therefor. At the Effective Time, outstanding equity awards of NRCG were automatically assumed by the Company and converted into equity awards of the Company pursuant to the terms of the Merger Agreement.
In addition, in the NRCG Merger, each share of 7.00% Series A Convertible Cumulative Preferred Stock, par value $0.0001 per share, of NRCG (the “NRCG Series A Preferred Stock”) was converted into, and became exchangeable for 1.7506 shares of Company Common Stock in accordance with the Merger Agreement.
At the closing of the NRCG Merger, in respect of each outstanding warrant to purchase NRCG Common Stock (each, a “NRCG Warrant”) issued pursuant to that certain Warrant Agreement, dated as of June 22, 2017 (the “NRCG Warrant Agreement”), between Continental Stock Transfer & Trust Company and NRCG, the Company issued a replacement warrant (each, a “Replacement Warrant”) to each holder of such NRCG Warrant that complies with and satisfies that applicable terms and conditions under the NRCG Warrant Agreement and is exercisable for a number of shares of Company Common Stock equal to the product (rounded to the nearest whole number) of (1) the number of shares of NRCG Common Stock that would have been issuable upon the exercise of the NRCG Warrant immediately prior to the effective time of the NRCG Merger and (2) the NRCG Exchange Ratio, at an exercise price equal to $58.67.
At the Effective Time, Predecessor US Ecology caused all shares of the Company issued and outstanding immediately prior to the Effective Time to be surrendered and cancelled and cease to exist, with no consideration delivered in exchange therefor.
Effective as of the close of market on October 31, 2019, each of the Predecessor US Ecology Common Stock, the NRCG Common Stock and the NRCG Warrants ceased to be traded on the Nasdaq Global Select Market and NYSE American, respectively. As a consequence of the Mergers, Form 25s were filed to (i) remove of the Predecessor US Ecology Common Stock from listing and registration on Nasdaq and from registration under the Exchange Act and (ii) remove the NRCG Common Stock and NRCG Warrants from listing and registration on NYSE American, and each of Predecessor US Ecology and NRCG intend to file a Form 15 with the SEC to terminate the registration under the Exchange Act of the Predecessor US Ecology Common Stock and the NRCG Common Stock and NRCG Warrants, respectively, and suspend all of their respective reporting obligations under Section 15(d) of the Exchange Act.
Effective as of November 1, 2019, the Company changed its name from “US Ecology Parent, Inc.” to “US Ecology, Inc.,” the Company Common Stock and the Replacement Warrants began trading on the Nasdaq Global Select Market under the symbol “ECOL” and “ECOLW,” respectively. Also effective as of November 1, 2019, Predecessor US Ecology changed its name from “US Ecology, Inc.” to “US Ecology Holdings, Inc.”
See Note 18 for additional information on the NRCG Merger.
NOTE 2. REVENUES
Our operations are managed in two reportable segments, Environmental Services and Field & Industrial Services, reflecting our internal reporting structure and nature of services offered. See Note 17 for additional information on our operating segments.
Effective December 31, 2018, we changed our presentation of disaggregated revenues to align with changes in how we manage our service lines within our Field & Industrial Services segment. Revenues previously combined and reported as Technical Services are now disaggregated into two service lines, Small Quantity Generation (“SQG”) and Total Waste Management (“TWM”) and certain revenues formerly classified as Technical Services are now included in Remediation. Also, marine terminal services revenues, formerly classified as Other, are now included in Industrial Services. Effective January 1, 2019, Emergency Response revenues, formerly classified as Other, are now presented as a discrete service line. We also conformed the allocation of intercompany revenues between Treatment & Disposal Revenue and Services
10
Revenue to be consistent across both segments. Throughout this Quarterly Report on Form 10-Q, our disaggregated revenues for all periods presented have been recast to reflect these changes.
The following table presents our revenue disaggregated by our reportable segments and service lines:
11
| (1) | We categorize our treatment and disposal revenue as either “Base Business” or “Event Business” based on the underlying nature of the revenue source. We define Event Business as non-recurring projects that are expected to equal or exceed 1,000 tons, with Base Business defined as all other business not meeting the definition of Event Business. For the three months ended September 30, 2019 and 2018, 25% and 22%, respectively, of our treatment and disposal revenue was derived from Event Business projects. Base Business revenue accounted for 75% and 78% of our treatment and disposal revenue for the three months ended September 30, 2019 and 2018, respectively. For the nine months ended September 30, 2019 and 2018, 22% and 20%, respectively, of our treatment and disposal revenue was derived from Event Business projects. Base Business revenue accounted for 78% and 80% of our treatment and disposal revenue for the nine months ended September 30, 2019 and 2018, respectively. |
| (2) | Includes collection and transportation of non-hazardous and hazardous waste. |
| (3) | Includes industrial cleaning and maintenance for refineries, chemical plants, steel and automotive plants, marine terminals and refinery services such as tank cleaning and temporary storage. |
| (4) | Includes retail services, laboratory packing, less-than-truck-load service and household hazardous waste collection. Contracts for Small Quantity Generation may extend beyond one year and a portion of the transaction price can be fixed. |
| (5) | Through our TWM program, customers outsource the management of their waste compliance program to us, allowing us to organize and coordinate their waste management disposal activities and environmental compliance. TWM contracts may extend beyond one year and a portion of the transaction price can be fixed. |
| (6) | Includes site assessment, onsite treatment, project management and remedial action planning and execution. Contracts for Remediation may extend beyond one year and a portion of the transaction price can be fixed. |
| (7) | Includes spill response, waste analysis and treatment and disposal planning. |
| (8) | Includes equipment rental and other miscellaneous services. |
We provide services in the United States and Canada. The following table presents our revenue disaggregated by our reportable segments and geographic location where the underlying services were performed:
12
Deferred Revenue
We record deferred revenue when cash payments are received, or advance billings are charged, prior to performance of services. Deferred revenue includes waste that has been received but not yet treated or disposed, and is recognized when services are performed. During the three months ended September 30, 2019 and 2018, we recognized $738,000 and $496,000 of revenue, respectively, that was included in the deferred revenue balance at the beginning of each year. During the nine months ended September 30, 2019 and 2018, we recognized $9.7 million and $8.3 million of revenue, respectively, that was included in the deferred revenue balance at the beginning of each year.
Receivables
Our receivables include invoiced and unbilled amounts where the Company has an unconditional right to payment.
Principal versus Agent Considerations
The Company commonly contracts with third-parties to perform certain waste-related services that we have promised in our customer contracts. We consider ourselves the principal in these arrangements as we direct the timing, nature and pricing of the services ultimately provided by the third-party to the customer.
Costs to obtain a contract
The Company pays sales commissions to employees, which qualify as costs to obtain a contract. Sales commissions are expensed as incurred as the commissions are earned by the employee and paid by the Company over time as the related revenue is recognized.
Practical Expedients and Optional Exemptions
Our payment terms may vary based on type of service or customer; however, we do not adjust the promised amount of consideration in our contracts for the time value of money as payment terms extended to our customers do not exceed one year and are not considered a significant financing component in our contracts.
We do not disclose the value of unsatisfied performance obligations as contracts with an original expected length of more than one year and contracts for which we do not recognize revenue at the amount to which we have the right to invoice for services performed is insignificant and the aggregate amount of fixed consideration allocated to unsatisfied performance obligations is not material.
NOTE 3. BUSINESS COMBINATIONS
NRC Group Holdings Corp.
On November 1, 2019, we completed our previously announced merger transaction with NRCG. See Note 1 and Note 18 for additional information.
W.I.S.E. Environmental Solutions Inc.
On August 1, 2019, we acquired 100% of the outstanding shares of W.I.S.E. Environmental Services Inc. (“US Ecology Sarnia”), an equipment rental and waste services company based in Sarnia, Ontario, Canada for 23.5 million Canadian dollars, which translated to $17.9 million at the time of transaction. The purchase price is subject to post-closing adjustments based on agreed upon working capital requirements, which are expected to be finalized and settled in the fourth quarter of 2019. US Ecology Sarnia is reported as part of our Field & Industrial Services segment. The Company assessed the revenues, net income, earnings per share and total assets of US Ecology Sarnia and concluded they are not material to our consolidated financial position or results of operations.
13
We allocated the purchase price to the assets acquired and liabilities assumed based on estimates of the fair value at the date of the acquisition, resulting in $9.0 million allocated to goodwill and $4.3 million allocated to intangible assets (primarily customer relationships) to be amortized over a weighted average life of approximately 14 years. All of the goodwill recognized was assigned to our Field & Industrial Services segment and is not expected to be deductible for income tax purposes.
Ecoserv Industrial Disposal, LLC
On November 14, 2018, the Company acquired Ecoserv Industrial Disposal, LLC (“Winnie”), which provides non-hazardous industrial wastewater disposal solutions and employs deep-well injection technology in the southern United States.
The following table summarizes the consideration paid for Winnie and the fair value estimates of assets acquired and liabilities assumed, recognized at the acquisition date, with purchase price allocation adjustments since the preliminary purchase price allocation as previously disclosed as of December 31, 2018:
Purchase price allocation adjustments relate primarily to the receipt of additional information regarding the fair values of property and equipment, a post-closing price adjustment based on working capital requirements and residual goodwill.
NOTE 4. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Changes in accumulated other comprehensive income (loss) (“AOCI”) consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign |
|
Unrealized Gain |
|
|
|
||
|
|
|
Currency |
|
(Loss) on Interest |
|
|
|
||
|
$s in thousands |
|
Translation |
|
Rate Hedge |
|
Total |
|||
|
Balance at December 31, 2018 |
|
$ |
(14,697) |
|
$ |
906 |
|
$ |
(13,791) |
|
Other comprehensive income (loss) before reclassifications, net of tax |
|
|
2,374 |
|
|
(1,780) |
|
|
594 |
|
Amounts reclassified out of AOCI, net of tax (1) |
|
|
— |
|
|
(238) |
|
|
(238) |
|
Other comprehensive income, net |
|
|
2,374 |
|
|
(2,018) |
|
|
356 |
|
Balance at September 30, 2019 |
|
$ |
(12,323) |
|
$ |
(1,112) |
|
$ |
(13,435) |
| (1) | Before-tax reclassifications of $35,000 ($27,000 after-tax) and $301,000 ($238,000 after-tax) for the three and nine months ended September 30, 2019, respectively, were included as a reduction of Interest expense in the Company’s consolidated statements of operations. Amounts relate to the Company’s interest rate swap which is designated as a cash flow hedge. Changes in fair value of the swap recognized in AOCI are reclassified to interest expense when hedged interest payments on the underlying long-term debt are made. Amounts in AOCI expected to be recognized as a reduction of interest expense over the next 12 months total approximately $139,000 ($110,000 after-tax). |
14
| (2) | Before-tax reclassifications of $40,000 ($31,000 after-tax) and $432,000 ($341,000 after-tax) for the three and nine months ended September 30, 2018, respectively, were included in Interest expense in the Company’s consolidated statements of operations. Amounts relate to the Company’s interest rate swap which is designated as a cash flow hedge. Changes in fair value of the swap recognized in AOCI are reclassified to interest expense when hedged interest payments on the underlying long-term debt are made. |
NOTE 5. CONCENTRATIONS AND CREDIT RISK
Major Customers
No customer accounted for more than 10% of total revenue for the three or nine months ended September 30, 2019 or 2018, respectively. No customer accounted for more than 10% of total trade receivables as of September 30, 2019 or December 31, 2018.
Credit Risk Concentration
We maintain most of our cash and cash equivalents with nationally recognized financial institutions. Substantially all balances are uninsured and are not used as collateral for other obligations. Concentrations of credit risk on accounts receivable are believed to be limited due to the number, diversification and character of the obligors and our credit evaluation process.
NOTE 6. RECEIVABLES
Receivables consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
December 31, |
||
|
$s in thousands |
|
2019 |
|
2018 |
||
|
Trade |
|
$ |
117,913 |
|
$ |
118,909 |
|
Unbilled revenue |
|
|
30,810 |
|
|
26,538 |
|
Other |
|
|
9,739 |
|
|
2,241 |
|
Total receivables |
|
|
158,462 |
|
|
147,688 |
|
Allowance for doubtful accounts |
|
|
(2,636) |
|
|
(2,998) |
|
Receivables, net |
|
$ |
155,826 |
|
$ |
144,690 |
NOTE 7. FAIR VALUE MEASUREMENTS
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Assets and liabilities recorded at fair value are categorized using defined hierarchical levels directly related to the amount of subjectivity associated with the inputs to fair value measurements, as follows:
Level 1 - Quoted prices in active markets for identical assets or liabilities;
15
Level 2 - Inputs other than quoted prices included within Level 1 that are either directly or indirectly observable;
Level 3 - Unobservable inputs in which little or no market activity exists, requiring an entity to develop its own assumptions that market participants would use to value the asset or liability.
The Company’s financial instruments consist of cash and cash equivalents, accounts receivable, restricted cash and investments, accounts payable, accrued liabilities, debt and interest rate swap agreements. The estimated fair value of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate their carrying value due to the short-term nature of these instruments.
On September 19, 2019, the Company invested $7.9 million in the preferred stock of a privately held company which is included in Other assets in the Company’s consolidated balance sheets. The investment does not have a readily determinable fair value therefore the investment is valued at cost, less impairment, plus or minus observable price changes of an identical or similar investment of the same issuer, if any. As of September 30, 2019, there have been no identified events or changes in circumstances that would indicate the cost method investment should be impaired nor have there been any observable price changes of an identical or similar investment of the same issuer.
The Company estimates the fair value of its variable-rate debt using Level 2 inputs, such as interest rates, related terms and maturities of similar obligations. At September 30, 2019, the carrying value of the Company’s variable-rate debt approximates fair value due to the short-term nature of the interest rates.
The Company’s assets and liabilities measured at fair value on a recurring basis consisted of the following:
| (1) | We invest a portion of our Restricted cash and investments in fixed-income securities, including U.S. Treasury and U.S. agency securities. We measure the fair value of U.S. Treasury securities using quoted prices for identical assets in active markets. We measure the fair value of U.S. agency securities using observable market activity for similar assets. The fair value of our fixed-income securities approximates our cost basis in the investments. |
| (2) | We invest a portion of our Restricted cash and investments in money market funds. We measure the fair value of these money market fund investments using quoted prices for identical assets in active markets. Money market funds are |
16
| considered restricted cash for purposes of reconciling the beginning-of-period and end-of-period amounts presented in the Company’s consolidated statements of cash flows. |
| (3) | In order to manage interest rate exposure, we entered into an interest rate swap agreement in October 2014 that effectively converts a portion of our variable-rate debt to a fixed interest rate. The swap is designated as a cash flow hedge, with gains and losses deferred in other comprehensive income to be recognized as an adjustment to interest expense in the same period that the hedged interest payments affect earnings. The interest rate swap has an effective date of December 31, 2014 with an initial notional amount of $250.0 million. The fair value of the interest rate swap agreement represents the difference in the present value of cash flows calculated at the contracted interest rates and at current market interest rates at the end of the period. We calculate the fair value of the interest rate swap agreement quarterly based on the quoted market price for the same or similar financial instruments. The fair value of the interest rate swap agreement is included in Other long-term liabilities and Other assets in the Company’s consolidated balance sheet as of September 30, 2019 and December 31, 2018, respectively. |
NOTE 8. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
December 31, |
||
|
$s in thousands |
|
2019 |
|
2018 |
||
|
Cell development costs |
|
$ |
146,861 |
|
$ |
146,155 |
|
Land and improvements |
|
|
51,997 |
|
|
50,481 |
|
Buildings and improvements |
|
|
92,389 |
|
|
91,358 |
|
Railcars |
|
|
17,299 |
|
|
17,299 |
|
Vehicles and other equipment |
|
|
169,454 |
|
|
154,014 |
|
Construction in progress |
|
|
36,303 |
|
|
14,554 |
|
Total property and equipment |
|
|
514,303 |
|
|
473,861 |
|
Accumulated depreciation and amortization |
|
|
(240,522) |
|
|
(215,418) |
|
Property and equipment, net |
|
$ |
273,781 |
|
$ |
258,443 |
Depreciation and amortization expense for the three months ended September 30, 2019 and 2018 was $9.4 million and $7.3 million, respectively. Depreciation and amortization expense for the nine months ended September 30, 2019 and 2018 was $26.7 million and $21.0 million, respectively.
NOTE 9. LEASES
We lease certain facilities, office space, land and equipment. Our lease payments are primarily fixed, but also include variable payments that are based on usage of the leased asset. Initial lease terms range from one to 15 years, and may include one or more options to renew, with renewal terms extending a lease up to 40 years. None of our renewal options are considered reasonably certain to be exercised. Provisions for residual value guarantees exist in some of our equipment leases, however amounts associated with these provisions are not material. Our leases do not include any material restrictive covenants.
Leases with an initial term of 12 months or less are not recorded on the balance sheet and expense is recognized on a straight-line basis over the lease term. We combine lease and nonlease components in our leases, except for equipment leases that include maintenance related services. We use the rate implicit in the lease, when available, to discount lease payments to present value. However, many of our leases do not provide a readily determinable implicit rate and we estimate our incremental borrowing rate to discount payments based on information available at lease commencement.
17
Lease assets and liabilities consisted of the following:
| (1) | Included in Operating lease assets in the Company’s consolidated balance sheets. |
| (2) | Included in Property and equipment, net in the Company’s consolidated balance sheets. Finance right-of-use assets are recorded net of accumulated amortization of $1.8 million as of September 30, 2019. |
| (3) | Included in Current portion of operating lease liabilities in the Company’s consolidated balance sheets. |
| (4) | Included in Accrued liabilities in the Company’s consolidated balance sheets. |
| (5) | Included in Long-term operating lease liabilities in the Company’s consolidated balance sheets. |
| (6) | Included in Other long-term liabilities in the Company’s consolidated balance sheets. |
Lease expense consisted of the following:
| (1) | Included in Direct operating costs and Selling, general, and administrative expenses in the Company’s consolidated statements of operations. Operating lease cost includes short-term leases, excluding expenses relating to leases with a term of one month or less, which are not material. Operating lease cost excludes variable lease costs which are not material. |
| (2) | Included in Direct operating costs in the Company’s consolidated statements of operations. |
| (3) | Included in Interest expense in the Company’s consolidated statements of operations. |
Supplemental cash flow information related to our leases is as follows:
18
Other information related to our leases is as follows:
The Company’s maturity analysis of its lease liabilities as of September 30, 2019 is as follows:
Future minimum lease payments on non-cancellable operating leases as of December 31, 2018 are as follows:
|
|
|
|
|
|
$s in thousands |
|
Payments |
|
|
2019 |
|
$ |
5,638 |
|
2020 |
|
|
3,644 |
|
2021 |
|
|
3,184 |
|
2022 |
|
|
1,885 |
|
2023 |
|
|
1,457 |
|
Thereafter |
|
|
5,065 |
|
|
|
$ |
20,873 |
NOTE 10. GOODWILL AND INTANGIBLE ASSETS
Changes in goodwill for the nine months ended September 30, 2019 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Field & |
|
|
|
||||
|
|
|
Environmental |
|
Industrial |
|
|
|
||||||||
|
|
|
Services |
|
Services |
|
|
|
||||||||
|
|
|
|
|
Accumulated |
|
|
|
Accumulated |
|
|
|
||||
|
$s in thousands |
|
Gross |
|
Impairment |
|
Gross |
|
Impairment |
|
Total |
|||||
|
Balance at December 31, 2018 |
|
$ |
162,816 |
|
$ |
(6,870) |
|
$ |
51,231 |
|
$ |
— |
|
$ |
207,177 |
|
US Ecology Sarnia acquisition |
|
|
— |
|
|
— |
|
|
8,975 |
|
|
— |
|
|
8,975 |
|
Winnie purchase price allocation adjustment |
|
|
2,586 |
|
|
— |
|
|
— |
|
|
— |
|
|
2,586 |
|
Foreign currency translation |
|
|
503 |
|
|
— |
|
|
(60) |
|
|
— |
|
|
443 |
|
Balance at September 30, 2019 |
|
$ |
165,905 |
|
$ |
(6,870) |
|
$ |
60,146 |
|
$ |
— |
|
$ |
219,181 |
19
Intangible assets, net consisted of the following:
During the nine months ended September 30, 2019, the Company acquired US Ecology Sarnia and recorded $9.0 million of goodwill and $4.3 million of amortizing intangible assets (consisting primarily of customer relationships). See Note 3 for additional information.
Amortization expense for the three months ended September 30, 2019 and 2018 was $2.9 million and $2.3 million, respectively. Amortization expense for the nine months ended September 30, 2019 and 2018 was $8.6 million and $6.9 million, respectively. Foreign intangible asset carrying amounts are affected by foreign currency translation.
NOTE 11. DEBT
Long-term debt consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
December 31, |
||
|
$s in thousands |
|
2019 |
|
2018 |
||
|
Revolving credit facility |
|
$ |
354,000 |
|
$ |
364,000 |
|
Long-term debt |
|
$ |
354,000 |
|
$ |
364,000 |
2017 Credit Agreement
On April 18, 2017, Predecessor US Ecology, a wholly-owned subsidiary of the Company, entered into a senior secured credit agreement (the “2017 Credit Agreement”) with Wells Fargo Bank, National Association (“Wells Fargo”), as administrative agent for the lenders, swingline lender and issuing lender, and Bank of America, N.A., as an issuing lender, that provides for a $500.0 million, five-year revolving credit facility (the “Revolving Credit Facility”), including a $75.0 million sublimit for the issuance of standby letters of credit and a $25.0 million sublimit for the issuance of swingline loans used to fund short-term working capital requirements. The 2017 Credit Agreement also contains an accordion feature whereby Predecessor US Ecology may request up to $200.0 million of additional funds through an increase to the Revolving Credit Facility, through incremental term loans, or some combination thereof. As described below, the 2017 Credit Agreement was amended in November 2019 in connection with Mergers. In addition, as a result of the consummation of the Mergers, the borrower under the 2017 Credit Facility is Predecessor US Ecology, a wholly-owned subsidiary of the Company.
The Revolving Credit Facility provides up to $500.0 million of revolving credit loans or letters of credit with the use of proceeds restricted solely for working capital and other general corporate purposes (including acquisitions and capital
20
expenditures). Under the Revolving Credit Facility, revolving credit loans are available based on a base rate (as defined in the 2017 Credit Agreement) or LIBOR, at Predecessor US Ecology’s option, plus an applicable margin which is determined according to a pricing grid under which the interest rate decreases or increases based on our ratio of funded debt to consolidated earnings before interest, taxes, depreciation and amortization (as defined in the 2017 Credit Agreement), as set forth in the table below:
|
Total Net Leverage Ratio |
LIBOR Rate Loans Interest Margin |
Base Rate Loans Interest Margin |
|
Equal to or greater than 3.25 to 1.00 |
2.00% |
1.00% |
|
Equal to or greater than 2.50 to 1.00, but less than 3.25 to 1.00 |
1.75% |
0.75% |
|
Equal to or greater than 1.75 to 1.00, but less than 2.50 to 1.00 |
1.50% |
0.50% |
|
Equal to or greater than 1.00 to 1.00, but less than 1.75 to 1.00 |
1.25% |
0.25% |
|
Less than 1.00 to 1.00 |
1.00% |
0.00% |
At September 30, 2019, the effective interest rate on the Revolving Credit Facility, after giving effect to the impact of our interest rate swap, was 3.62%. Interest only payments are due either quarterly or on the last day of any interest period, as applicable.
In October 2014, Predecessor US Ecology entered into an interest rate swap agreement, effectively fixing the interest rate on $155.0 million, or 44%, of the Revolving Credit Facility borrowings as of September 30, 2019.
Predecessor US Ecology is required to pay a commitment fee ranging from 0.175% to 0.35% on the average daily unused portion of the Revolving Credit Facility, with such commitment fee to be reduced based upon Predecessor US Ecology’s total net leverage ratio (as defined in the 2017 Credit Agreement). The maximum letter of credit capacity under the Revolving Credit Facility is $75.0 million and the 2017 Credit Agreement provides for a letter of credit fee equal to the applicable margin for LIBOR loans under the Revolving Credit Facility. At September 30, 2019, there were $354.0 million of revolving credit loans outstanding on the Revolving Credit Facility. These revolving credit loans are due upon the earliest to occur of (a) April 18, 2022 (or, with respect to any lender, such later date as requested by us and accepted by such lender), (b) the date of termination of the entire revolving credit commitment (as defined in the 2017 Credit Agreement) by us, and (c) the date of termination of the revolving credit commitment and are presented as Long-term debt in the consolidated balance sheets.
Predecessor US Ecology has entered into a sweep arrangement whereby day-to-day cash requirements in excess of available cash balances are advanced to the Company on an as-needed basis with repayments of these advances automatically made from subsequent deposits to our cash operating accounts (the “Sweep Arrangement”). Total advances outstanding under the Sweep Arrangement are subject to the $25.0 million swingline loan sublimit under the Revolving Credit Facility. The Company’s revolving credit loans outstanding under the Revolving Credit Facility are not subject to repayment through the Sweep Arrangement. As of September 30, 2019, there were $1.5 million in borrowings outstanding subject to the Sweep Arrangement, which are presented as Short-term borrowings in the consolidated balance sheet.
As of September 30, 2019, the availability under the Revolving Credit Facility was $138.7 million with $5.7 million of the Revolving Credit Facility issued in the form of standby letters of credit utilized as collateral for closure and post-closure financial assurance and other assurance obligations.
Predecessor US Ecology may at any time and from time to time prepay revolving credit loans and swingline loans, in whole or in part, without premium or penalty, subject to the obligation to indemnify each of the lenders against any actual loss or expense (including any loss or expense arising from the liquidation or reemployment of funds obtained by it to maintain a LIBOR rate loan (as defined in the 2017 Credit Agreement) or from fees payable to terminate the deposits from which such funds were obtained) with respect to the early termination of any LIBOR rate loan. The 2017 Credit Agreement provides for mandatory prepayment at any time if the revolving credit outstanding exceeds the revolving credit commitment (as such terms are defined in the 2017 Credit Agreement), in an amount equal to such excess. Subject to certain exceptions, the 2017 Credit Agreement provides for mandatory prepayment upon certain asset dispositions, casualty events and issuances of indebtedness.
21
Pursuant to (i) an unconditional guarantee agreement and (ii) a collateral agreement, each entered into by Predecessor US Ecology and its domestic subsidiaries on April 18, 2017, Predecessor US Ecology’s obligations under the 2017 Credit Agreement are (or will be) jointly and severally and fully and unconditionally guaranteed on a senior basis by all of the Company’s existing and certain future domestic subsidiaries and are secured by substantially all of the assets of Predecessor US Ecology and the Company’s existing and certain future domestic subsidiaries (subject to certain exclusions), including 100% of the equity interests of the Company’s domestic subsidiaries and 65% of the voting equity interests of the Company’s directly owned foreign subsidiaries (and 100% of the non-voting equity interests of the Company’s directly owned foreign subsidiaries).
The 2017 Credit Agreement contains customary restrictive covenants, subject to certain permitted amounts and exceptions, including covenants limiting the ability of the Company to incur additional indebtedness, pay dividends and make other restricted payments, repurchase shares of our outstanding stock and create certain liens. Upon the occurrence of an event of default (as defined in the 2017 Credit Agreement), among other things, amounts outstanding under the 2017 Credit Agreement may be accelerated and the commitments may be terminated.
The 2017 Credit Agreement also contains financial maintenance covenants, a maximum consolidated total net leverage ratio and a consolidated interest coverage ratio (as such terms are defined in the 2017 Credit Agreement). Our consolidated total net leverage ratio as of the last day of any fiscal quarter may not exceed 3.50 to 1.00, subject to certain exceptions. Our consolidated interest coverage ratio as of the last day of any fiscal quarter may not be less than 3.00 to 1.00.
At September 30, 2019, we were in compliance with all of the financial covenants in the 2017 Credit Agreement.
Amendments to the 2017 Credit Agreement
On August 6, 2019, Predecessor US Ecology entered into the first amendment (the “First Amendment”) to the 2017 Credit Agreement, by and among Predecessor US Ecology, the subsidiaries of Predecessor US Ecology party thereto, the lenders referred to therein and Wells Fargo, as issuing lender, swingline lender and administrative agent. Effective November 1, 2019, the First Amendment, among other things, extended the expiration of the Revolving Credit Facility to November 1, 2024, permitted the issuance of a $400.0 million incremental term loan to be used to refinance existing indebtedness of NRCG and pay related transaction expenses in connection with the Mergers, modified the accordion feature allowing the Company to request up to the greater of (x) $250.0 million and (y) 100% of consolidated EBITDA plus certain additional amounts, increased the sublimit for the issuance of swingline loans to $40.0 million and increased the maximum consolidated total net leverage ratio to 4.00 to 1.00.
On November 1, 2019, Predecessor US Ecology entered into the lender joinder agreement and second amendment (the “Second Amendment”) to the 2017 Credit Agreement. Effective November 1, 2019, the Second Amendment, among other things, amended the 2017 Credit Agreement to increase the capacity for incremental term loans by $50.0 million and provided for Wells Fargo lending $450.0 million in incremental term loans to Predecessor US Ecology to pay off the existing debt of NRCG in connection with the Mergers, to pay certain fees, costs and expenses incurred in connection with the Mergers and to repay outstanding borrowings under the Revolving Credit Facility. The seven-year incremental term loan matures November 1, 2026, requires principal repayment of 1% annually, and bears interest at LIBOR plus 2.25% or a base rate plus 1.25% (with a step-up to LIBOR plus 2.50% or a base rate plus 1.50% in the event that US Ecology credit ratings are not BB (with a stable or better outlook) or better from S&P and Ba2 (with a stable or better outlook) or better from Moody’s).
NOTE 12. CLOSURE AND POST-CLOSURE OBLIGATIONS
Our accrued closure and post-closure liability represents the expected future costs, including corrective actions, associated with closure and post-closure of our operating and non-operating disposal facilities. We record the fair value of our closure and post-closure obligations as a liability in the period in which the regulatory obligation to retire a specific asset is triggered. For our individual landfill cells, the required closure and post-closure obligations under the terms of our permits and our intended operation of the landfill cell are triggered and recorded when the cell is placed into service and waste is
22
initially disposed in the landfill cell. The fair value is based on the total estimated costs to close the landfill cell and perform post-closure activities once the landfill cell has reached capacity and is no longer accepting waste. We perform periodic reviews of both non-operating and operating facilities and revise accruals for estimated closure and post-closure, remediation or other costs as necessary. Recorded liabilities are based on our best estimates of current costs and are updated periodically to include the effects of existing technology, presently enacted laws and regulations, inflation and other economic factors.
Changes to closure and post-closure obligations consisted of the following:
NOTE 13. INCOME TAXES
Our effective tax rate for the three months ended September 30, 2019 was 33.0%, up from 20.2% for the three months ended September 30, 2018. Our effective tax rate for the nine months ended September 30, 2019 was 30.2%, up from 23.7% for the nine months ended September 30, 2018. These increases were primarily due to higher non-deductible expenses during the three and nine months ended September 30, 2019 compared to the three and nine months ended September 30, 2018. In addition, the Company implemented various one-time federal and state tax planning strategies during the three months ended September 30, 2018 that favorably impacted the effective tax rate.
Gross unrecognized tax benefits, included in Other long-term liabilities in the consolidated balance sheets, were $247,000 and $555,000 as of September 30, 2019 and December 31, 2018, respectively. The decrease in the gross unrecognized tax benefits was the result of the state of Idaho audit completion, as well as federal statute of limitations expirations. The gross unrecognized tax benefits, if recognized by the Company, will result in a reduction of approximately $236,000 to the provision for income taxes thereby favorably impacting the Company’s effective tax rate. We do not anticipate our total unrecognized tax benefits to increase or decrease materially within the next twelve months. We recognize interest assessed by taxing authorities or interest associated with uncertain tax positions as a component of interest expense. We recognize any penalties assessed by taxing authorities or penalties associated with uncertain tax positions as a component of Selling, general and administrative expenses.
We file a consolidated U.S. federal income tax return with the Internal Revenue Service (“IRS”) as well as tax returns in various states, Canada, and Mexico. The Company is subject to examination by the IRS for tax years 2015 through 2018. The Company is currently under examination by the state of Texas for the year 2014. During the third quarter of 2019, the state of Idaho examination for the years 2014 through 2018 concluded with no material changes. We may be subject to examinations by various state and local taxing jurisdictions for tax years 2014 through 2018. The tax years 2015 through 2018 remain subject to examination by foreign jurisdictions. We are currently not aware of any other significant examinations by taxing authorities.
23
NOTE 14. EARNINGS PER SHARE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
||||||||||
|
|
|
2019 |
|
2018 |
||||||||
|
$s and shares in thousands, except per share amounts |
|
Basic |
|
Diluted |
|
Basic |
|
Diluted |
||||
|
Net income |
|
$ |
13,070 |
|
$ |
13,070 |
|
$ |
13,427 |
|
$ |
13,427 |
|
Weighted average basic shares outstanding |
|
|
22,013 |
|
|
22,013 |
|
|
21,928 |
|
|
21,928 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive effect of share-based awards |
|
|
|
|
|
218 |
|
|
|
|
|
171 |
|
Weighted average diluted shares outstanding |
|
|
|
|
|
22,231 |
|
|
|
|
|
22,099 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share |
|
$ |
0.59 |
|
$ |
0.59 |
|
$ |
0.61 |
|
$ |
0.61 |
|
Anti-dilutive shares excluded from calculation |
|
|
|
|
|
80 |
|
|
|
|
|
16 |
NOTE 15. EQUITY
Stock Repurchase Program
On June 1, 2016, Predecessor US Ecology’s Board of Directors authorized the repurchase of $25.0 million of the Company’s outstanding common stock. Repurchases may be made from time to time in the open market or through privately negotiated transactions. The timing of any repurchases will be based upon prevailing market conditions and other factors. The Company did not repurchase any shares of common stock under the repurchase program during the three or nine months ended September 30, 2019. On May 29, 2018 the repurchase program was extended and will remain in effect until June 6, 2020, unless further extended by our Board of Directors.
Omnibus Incentive Plan
On May 27, 2015, our stockholders approved the Omnibus Incentive Plan (“Omnibus Plan”), which was approved by our Board of Directors on April 7, 2015. The Omnibus Plan was developed to provide additional incentives through equity ownership in the Company and, as a result, encourage employees and directors to contribute to our success. The Omnibus Plan provides, among other things, the ability for the Company to grant restricted stock, performance stock, options, stock appreciation rights, restricted stock units (“RSUs”), performance stock units (“PSUs”) and other share-based awards or cash awards to officers, employees, consultants and non-employee directors. Subsequent to the approval of the Omnibus Plan in May 2015, we stopped granting equity awards under our 2008 Stock Option Incentive Plan and our 2006 Restricted Stock Plan (collectively, the “Previous Plans”). The Previous Plans will remain in effect solely for the settlement of awards granted under the Previous Plans. No shares that are reserved but unissued under the Previous Plans or that are outstanding under the Previous Plans and reacquired by the Company for any reason will be available for issuance under the Omnibus Plan. The Omnibus Plan expires on April 7, 2025 and authorizes 1,500,000 shares of common stock for grant over the life of the Omnibus Plan. As of September 30, 2019, 873,163 shares of common stock remain available for grant under the Omnibus Plan.
24
PSUs, RSUs and Restricted Stock
On March 1, 2019, the Company granted 17,111 PSUs to certain employees. Each PSU represents the right to receive, on the settlement date, one share of the Company’s common stock. The total number of PSUs each participant is eligible to earn ranges from 0% to 300% of the target number of PSUs granted. The actual number of PSUs that will vest and be settled in shares is determined at the end of a three-year performance period beginning January 1, 2019, based on adjusted earnings per share and return on invested capital relative to established targets with an additional adjustment based on total stockholder return relative to a set of peer companies. The fair value of the PSUs estimated on the grant date using a Monte Carlo simulation was $58.20 per unit. Compensation expense is recorded over the awards’ vesting period.
Assumptions used in the Monte Carlo simulation to calculate the fair value of the PSUs granted in 2019 are as follows:
|
|
|
|
|
|
|
|
|
2019 |
|
|
|
Stock price on grant date |
|
$ |
58.40 |
|
|
Expected term |
|
|
3.0 |
years |
|
Expected volatility |
|
|
30 |
% |
|
Risk-free interest rate |
|
|
2.5 |
% |
|
Expected dividend yield |
|
|
1.1 |
% |
A summary of our PSU, restricted stock and RSU activity for the nine months ended September 30, 2019 is as follows:
During the nine months ended September 30, 2019, 13,600 PSUs vested and PSU holders earned 19,414 shares of the Company’s common stock.
Stock Options
A summary of our stock option activity for the nine months ended September 30, 2019 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Exercise |
|
|
|
|
Shares |
|
Price |
|
|
Outstanding as of December 31, 2018 |
|
236,503 |
|
$ |
44.93 |
|
Granted |
|
41,100 |
|
|
63.36 |
|
Exercised |
|
(6,272) |
|
|
40.75 |
|
Cancelled, expired or forfeited |
|
(1,540) |
|
|
43.55 |
|
Outstanding as of September 30, 2019 |
|
269,791 |
|
$ |
47.84 |
|
Exercisable as of September 30, 2019 |
|
188,730 |
|
$ |
43.91 |
During the nine months ended September 30, 2019, option holders tendered 3,136 options in connection with options exercised via net share settlement.
25
Treasury Stock
During the nine months ended September 30, 2019, the Company repurchased 14,462 shares of the Company’s common stock in connection with the net share settlement of employee equity awards at an average cost of $63.34 per share. During the nine months ended September 30, 2019, the Company issued 8,900 treasury shares related to restricted stock awards at an average cost of $57.77 per share.
Dividends
The Company paid dividends of $0.18 per common share during each of the three months ended September 30, 2019 and 2018 and paid dividends of $0.54 per common share during each of the nine months ended September 30, 2019 and 2018.
NOTE 16. 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.
On November 17, 2018, an explosion occurred at our Grand View, Idaho facility, resulting in one employee fatality and injuries to other employees. The incident severely damaged the facility’s primary waste-treatment building as well as surrounding waste handling, waste storage, maintenance and administrative support structures, resulting in the closure of the entire facility that remained in effect through January 2019. We resumed landfill operations at our Grand View, Idaho facility in first quarter of 2019 and resumed operations of our secondary waste-treatment facility in the second quarter of 2019. Reconstruction of the primary waste-treatment building is currently underway. In addition to conducting our own investigation into the incident, we are fully cooperating with government agencies, including Idaho Department of Environmental Quality (“IDEQ”) and the U.S. Environmental Protection Agency (“USEPA”) to support their comprehensive and independent investigations of the incident. We cannot presently estimate the potential liability related to the incident and, therefore, no amounts related to such claims have been recorded in our financial statements as of September 30, 2019. We have not been named as a defendant in any civil action relating to the incident. As a result of the Occupational Safety and Health Administration’s (“OSHA”) inspection following the incident, OSHA issued a Citation and Notification of Penalty on May 6, 2019. We are currently contesting the Citation and Notification of Penalty before the Occupational Safety and Health Review Commission and the contested penalty is not material. We maintain workers’ compensation insurance, business interruption insurance and liability insurance for personal injury, property and casualty damage. We believe that any potential third-party claims associated with the explosion, in excess of our deductibles, are expected to be resolved primarily through our insurance policies. Although we carry business interruption insurance, a disruption of our business caused by a casualty event, including the full and partial closure of our Grand View, Idaho facility, may result in the loss of business, profits or customers during the time of such closure. Accordingly, our insurance policies may not fully compensate us for these losses.
The Company is actively working with its insurance companies on comprehensive property and business interruption insurance claims related to the incident at our Grand View, Idaho facility in the fourth quarter of 2018. The Company has received $10.0 million of property-related insurance payments in the first nine months of 2019 and has recognized $498,000 and $9.7 million of property-related insurance recovery gains for the three and nine months ended September 30, 2019, respectively. The Company has also recognized insurance recoveries of $699,000 and $4.7 million for the three and nine months ended September 30, 2019, respectively, related to expenses incurred to continue limited operations at
26
the facility and $2.6 million for both the three and nine months ended September 30, 2019, related to lost profits as a result of lost business or customers.
Other than as described above, during the period covered by this Quarterly Report on Form 10-Q, we have not been a party to any material legal proceedings.
NOTE 17. OPERATING SEGMENTS
Financial Information by Segment
Our operations are managed in two reportable segments reflecting our internal reporting structure and nature of services offered as follows:
Environmental Services - This segment provides a broad range of hazardous material management services including transportation, recycling, treatment and disposal of hazardous, non-hazardous and radioactive waste at Company-owned landfill, wastewater, deep-well injection and other treatment facilities.
Field & Industrial Services - This segment provides packaging and collection of hazardous waste and total waste management solutions at customer sites and through our 10-day transfer facilities. Services include on-site management, waste characterization, transportation and disposal of non-hazardous and hazardous waste. This segment also provides specialty field services such as industrial cleaning and maintenance, remediation, lab packs, retail services, transportation, emergency response and other services to commercial and industrial facilities and to government entities.
The operations not managed through our two reportable segments are recorded as “Corporate.” Corporate selling, general and administrative expenses include typical corporate items such as legal, accounting and other items of a general corporate nature. Income taxes are assigned to Corporate, but all other items are included in the segment where they originated. Inter-company transactions have been eliminated from the segment information and are not significant between segments.
Summarized financial information of our reportable segments is as follows:
27
Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization (“Adjusted EBITDA”)
Management uses Adjusted EBITDA as a financial measure to assess segment performance. Adjusted EBITDA is defined as net income before interest expense, interest income, income tax expense, depreciation, amortization, share-based compensation, accretion of closure and post-closure liabilities, foreign currency gain/loss, non-cash property and equipment impairment charges, non-cash goodwill and intangible asset impairment charges, property insurance recoveries and other income/expense. Adjusted EBITDA is a complement to results provided in accordance with GAAP and we believe that such information provides additional useful information to analysts, stockholders and other users to understand the Company’s operating performance. Since Adjusted EBITDA is not a measurement determined in accordance with GAAP and is thus susceptible to varying calculations, Adjusted EBITDA as presented may not be comparable to other similarly titled measures of other companies. Items excluded from Adjusted EBITDA are significant components in understanding and assessing our financial performance. Adjusted EBITDA should not be considered in isolation or as an alternative to, or substitute for, net income, cash flows generated by operations, investing or financing activities, or other financial statement data presented in the consolidated financial statements as indicators of financial performance or liquidity. Adjusted EBITDA has limitations as an analytical tool and should not be considered in isolation or a substitute for analyzing our results as reported under GAAP. Some of the limitations are:
| ● | Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs; |
| ● | Adjusted EBITDA does not reflect our interest expense, or the requirements necessary to service interest or principal payments on our debt; |
| ● | Adjusted EBITDA does not reflect our income tax expenses or the cash requirements to pay our taxes; |
| ● | Adjusted EBITDA does not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments; and |
| ● | Although depreciation and amortization charges are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for such replacements. |
28
A reconciliation of Net income to Adjusted EBITDA is as follows:
Adjusted EBITDA, by operating segment, is as follows:
Property and Equipment and Intangible Assets Outside of the United States
We provide services in the United States and Canada. Long-lived assets, comprised of property and equipment and intangible assets net of accumulated depreciation and amortization, by geographic location are as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
December 31, |
||
|
$s in thousands |
|
2019 |
|
2018 |
||
|
United States |
|
$ |
491,904 |
|
$ |
480,322 |
|
Canada |
|
|
57,860 |
|
|
57,787 |
|
Total long-lived assets |
|
$ |
549,764 |
|
$ |
538,109 |
NOTE 18. SUBSEQUENT EVENTS
Quarterly Dividend
On October 1, 2019, we declared a quarterly dividend of $0.18 per common share to stockholders of record on October 18, 2019. The dividend was paid using cash on hand on October 25, 2019 in an aggregate amount of $4.0 million.
NRCG Merger
As discussed above in Note 1, on November 1, 2019, upon the terms and subject to the conditions set forth in the Merger Agreement, the Mergers were completed. Following the completion of the Mergers, the Company contributed all of the issued and outstanding equity interests of NRCG to Predecessor US Ecology so that, after such contribution, NRCG became a wholly-owned subsidiary of Predecessor US Ecology.
29
Also on November 1, 2019, the Company entered into the Second Amendment to the 2017 Credit Agreement. Effective November 1, 2019, the Second Amendment, among other things, amended the 2017 Credit Agreement to increase the capacity for incremental term loans by $50.0 million and provided for Wells Fargo lending $450.0 million in incremental term loans to Predecessor US Ecology to pay off the existing debt of NRCG in connection with the Mergers, to pay certain fees, costs and expenses incurred in connection with the Mergers and to repay outstanding borrowings under the Revolving Credit Facility. The seven-year incremental term loan matures November 1, 2026, requires principal repayment of 1% annually, and bears interest at LIBOR plus 2.25% or a base rate plus 1.25% (with a step-up to LIBOR plus 2.50% or a base rate plus 1.50% in the event that US Ecology credit ratings are not BB (with a stable or better outlook) or better from S&P and Ba2 (with a stable or better outlook) or better from Moody’s).
30
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors of US Ecology, Inc.
Results of Review of Interim Financial Information
We have reviewed the accompanying consolidated balance sheet of US Ecology, Inc. and subsidiaries (the “Company”) as of September 30, 2019, the related consolidated statements of operations, comprehensive income, and stockholders’ equity for the three-month and nine-month periods ended September 30, 2019 and 2018, and of cash flows for the nine-month periods ended September 30, 2019 and 2018, and the related notes (collectively referred to as the “interim financial information”). Based on our reviews, we are not aware of any material modifications that should be made to the accompanying interim financial information for it to be in conformity with accounting principles generally accepted in the United States of America.
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheet of the Company as of December 31, 2018, and the related consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows for the year then ended (not presented herein); and in our report dated February 28, 2019, 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, 2018, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
Basis for Review Results
This interim financial information is the responsibility of the Company's management. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our reviews in accordance with standards of the PCAOB. 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 PCAOB, 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.
|
|
|
/s/ Deloitte & Touche LLP |
|
|
|
Boise, Idaho |
|
November 4, 2019 |
31
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The information contained in this section should be read in conjunction with our unaudited consolidated financial statements and related notes thereto appearing elsewhere in this quarterly report on Form 10-Q. In this report words such as “we,” “us,” “our,” “US Ecology” and “the Company” refer to US Ecology, Inc. and its subsidiaries.
OVERVIEW
US Ecology, Inc. is a leading North American provider of environmental services to commercial and government entities. The Company addresses the complex waste management needs of its customers, offering treatment, disposal and recycling of hazardous, non-hazardous and radioactive waste, as well as a wide range of complementary field and industrial services. US Ecology’s comprehensive knowledge of the waste business, its collection of waste management facilities and focus on safety, environmental compliance, and customer service enables us to effectively meet the needs of our customers and to build long-lasting relationships.
We have fixed facilities and service centers operating in the United States, Canada and Mexico. Our fixed facilities include five Resource Conservation and Recovery Act of 1976, subtitle C, hazardous waste landfills and one low-level radioactive waste landfill located near Beatty, Nevada; Richland, Washington; Robstown, Texas; Grand View, Idaho; Detroit, Michigan and Blainville, Québec, Canada. These facilities generate revenue from fees charged to transport, recycle, treat and dispose of waste and to perform various field and industrial services for our customers.
On November 1, 2019, upon the terms and subject to the conditions set forth in the Merger Agreement, the Mergers were completed. Following the completion of the Mergers, the Company contributed all of the issued and outstanding equity interests of NRCG to Predecessor US Ecology so that, after such contribution, NRCG became a wholly-owned subsidiary of Predecessor US Ecology. For additional information see Note 1 and Note 18 of the Notes to Consolidated Financial Statements in “Part I, Item 1. Financial Statements (Unaudited)” of this Quarterly Report on Form 10-Q.
Our operations are managed in two reportable segments reflecting our internal management reporting structure and nature of services offered as follows:
Environmental Services - This segment provides a broad range of hazardous material management services including transportation, recycling, treatment and disposal of hazardous, non-hazardous and radioactive waste at Company-owned landfill, wastewater, deep-well injection and other treatment facilities.
Field & Industrial Services - This segment provides packaging and collection of hazardous waste and total waste management solutions at customer sites and through our 10-day transfer facilities. Services include on-site management, waste characterization, transportation and disposal of non-hazardous and hazardous waste. This segment also provides specialty field services such as industrial cleaning and maintenance, remediation, lab packs, retail services, transportation, emergency response and other services to commercial and industrial facilities and to government entities.
In order to provide insight into the underlying drivers of our waste volumes and related treatment and disposal (“T&D”) revenues, we evaluate period-to-period changes in our T&D revenue for our Environmental Services segment based on the industry of the waste generator, based on North American Industry Classification System (“NAICS”) codes.
32
The composition of Environmental Services segment T&D revenues by waste generator industry for the three and nine months ended September 30, 2019 and 2018 were as follows:
| (1) | Excludes all transportation service revenue. |
| (2) | Includes retail and wholesale trade, rate regulated, construction and other industries. |
We also categorize our Environmental Services T&D revenue as either “Base Business” or “Event Business” based on the underlying nature of the revenue source.
Base Business consists of waste streams from ongoing industrial activities and tends to be recurring in nature. We define Event Business as non-recurring projects that are expected to equal or exceed 1,000 tons, with Base Business defined as all other business not meeting the definition of Event Business. The duration of Event Business projects can last from a several-week cleanup of a contaminated site to a multiple year cleanup project.
For the three months ended September 30, 2019, Base Business revenue increased 11% compared to the three months ended September 30, 2018. For the three months ended September 30, 2019, approximately 75% of our total T&D revenue was derived from our Base Business, down from 78% for the three months ended September 30, 2018. For the nine months ended September 30, 2019, Base Business revenue increased 8% compared to the nine months ended September 30, 2018. For the nine months ended September 30, 2019, approximately 78% of our total T&D revenue was derived from our Base Business, down from 80% for the nine months ended September 30, 2018. Our business is highly competitive and no assurance can be given that we will maintain these revenue levels or increase our market share.
A significant portion of our disposal revenue is attributable to discrete Event Business projects which vary widely in size, duration and unit pricing. For the three months ended September 30, 2019, approximately 25% of our total T&D revenue was derived from Event Business projects, up from 22% for the three months ended September 30, 2018. For the three
33
months ended September 30, 2019, Event Business revenue increased 32% compared to the three months ended September 30, 2018. For the nine months ended September 30, 2019, approximately 22% of our total T&D revenue was derived from Event Business projects, up from 20% for the nine months ended September 30, 2018. For the nine months ended September 30, 2019, Event Business revenue increased 24% compared to the nine months ended September 30, 2018. The one-time nature of Event Business, diverse spectrum of waste types received and widely varying unit pricing necessarily creates variability in revenue and earnings. This variability may be influenced by general and industry-specific economic conditions, funding availability, changes in laws and regulations, government enforcement actions or court orders, public controversy, litigation, weather, commercial real estate, closed military bases and other project timing, government appropriation and funding cycles and other factors. The types and amounts of waste received from Base Business also vary from quarter to quarter.
This variability can also cause significant quarter-to-quarter and year-to-year differences in revenue, gross profit, gross margin, operating income and net income. While we pursue many projects months or years in advance of work performance, cleanup project opportunities routinely arise with little or no prior notice. These market dynamics are inherent to the waste disposal business and are factored into our projections and externally communicated business outlook statements. Our projections combine historical experience with identified sales pipeline opportunities, new or expanded service line projections and prevailing market conditions.
Depending on project-specific customer needs and competitive economics, transportation services may be offered at or near our cost to help secure new business. For waste transported by rail from the eastern United States and other locations distant from our Grand View, Idaho and Robstown, Texas facilities, transportation-related revenue can account for as much as 75% of total project revenue. While bundling transportation and disposal services reduces overall gross profit as a percentage of total revenue (“gross margin”), this value-added service has allowed us to win multiple projects that management believes we could not have otherwise competed for successfully. Our Company-owned fleet of gondola railcars, which is periodically supplemented with railcars obtained under operating leases, has reduced our transportation expenses by largely eliminating reliance on more costly short-term rentals. These Company-owned railcars also help us to win business during times of demand-driven railcar scarcity.
The increased waste volumes resulting from projects won through this bundled service strategy further drive operating leverage benefits inherent to the disposal business, increasing profitability. While waste treatment and other variable costs are project-specific, the incremental earnings contribution from large and small projects generally increases as overall disposal volumes increase. Based on past experience, management believes that maximizing operating income, net income and earnings per share is a higher priority than maintaining or increasing gross margin. We intend to continue aggressively bidding bundled transportation and disposal services based on this proven strategy.
We serve oil refineries, chemical production plants, steel mills, waste brokers/aggregators serving small manufacturers and other industrial customers that are generally affected by the prevailing economic conditions and credit environment. Adverse conditions may cause our customers as well as those they serve to curtail operations, resulting in lower waste production and/or delayed spending on off-site waste shipments, maintenance, waste cleanup projects and other work. Factors that can impact general economic conditions and the level of spending by customers include, but are not limited to, consumer and industrial spending, increases in fuel and energy costs, conditions in the real estate and mortgage markets, labor and healthcare costs, access to credit, consumer confidence and other global economic factors affecting spending behavior. Market forces may also induce customers to reduce or cease operations, declare bankruptcy, liquidate or relocate to other countries, any of which could adversely affect our business. To the extent business is either government funded or driven by government regulations or enforcement actions, we believe it is less susceptible to general economic conditions. Spending by government agencies may be reduced due to declining tax revenues resulting from a weak economy or changes in policy. Disbursement of funds appropriated by Congress may also be delayed for various reasons.
34
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2019 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2018
Operating results and percentage of revenues were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
2019 vs. 2018 |
|
|||||||||||
|
$s in thousands |
|
2019 |
|
% |
|
2018 |
|
% |
|
$ Change |
|
% Change |
|
|||
|
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Environmental Services |
|
$ |
122,212 |
|
73 |
% |
$ |
107,197 |
|
71 |
% |
$ |
15,015 |
|
14 |
% |
|
Field & Industrial Services |
|
|
45,190 |
|
27 |
% |
|
44,219 |
|
29 |
% |
|
971 |
|
2 |
% |
|
Total |
|
|
167,402 |
|
100 |
% |
|
151,416 |
|
100 |
% |
|
15,986 |
|
11 |
% |
|
Gross Profit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Environmental Services |
|
|
49,363 |
|
40 |
% |
|
39,930 |
|
37 |
% |
|
9,433 |
|
24 |
% |
|
Field & Industrial Services |
|
|
7,177 |
|
16 |
% |
|
7,370 |
|
17 |
% |
|
(193) |
|
(3) |
% |
|
Total |
|
|
56,540 |
|
34 |
% |
|
47,300 |
|
31 |
% |
|
9,240 |
|
20 |
% |
|
Selling, General & Administrative Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Environmental Services |
|
|
8,333 |
|
7 |
% |
|
5,725 |
|
5 |
% |
|
2,608 |
|
46 |
% |
|
Field & Industrial Services |
|
|
3,756 |
|
8 |
% |
|
2,759 |
|
6 |
% |
|
997 |
|
36 |
% |
|
Corporate |
|
|
21,240 |
|
n/m |
|
|
15,165 |
|
n/m |
|
|
6,075 |
|
40 |
% |
|
Total |
|
|
33,329 |
|
20 |
% |
|
23,649 |
|
16 |
% |
|
9,680 |
|
41 |
% |
|
Adjusted EBITDA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Environmental Services |
|
|
51,409 |
|
42 |
% |
|
43,210 |
|
40 |
% |
|
8,199 |
|
19 |
% |
|
Field & Industrial Services |
|
|
5,848 |
|
13 |
% |
|
6,236 |
|
14 |
% |
|
(388) |
|
(6) |
% |
|
Corporate |
|
|
(19,831) |
|
n/m |
|
|
(13,846) |
|
n/m |
|
|
(5,985) |
|
43 |
% |
|
Total |
|
$ |
37,426 |
|
22 |
% |
$ |
35,600 |
|
24 |
% |
$ |
1,826 |
|
5 |
% |
Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization (“Adjusted EBITDA”)
Management uses Adjusted EBITDA as a financial measure to assess segment performance. Adjusted EBITDA is defined as net income before interest expense, interest income, income tax expense, depreciation, amortization, share-based compensation, accretion of closure and post-closure liabilities, foreign currency gain/loss, non-cash goodwill and intangible asset impairment charges, property insurance recoveries and other income/expense. The reconciliation of Net income to Adjusted EBITDA is as follows:
35
Adjusted EBITDA is a complement to results provided in accordance with accounting principles generally accepted in the United States (“GAAP”) and we believe that such information provides additional useful information to analysts, stockholders and other users to understand the Company’s operating performance. Since Adjusted EBITDA is not a measurement determined in accordance with GAAP and is thus susceptible to varying calculations, Adjusted EBITDA as presented may not be comparable to other similarly titled measures of other companies. Items excluded from Adjusted EBITDA are significant components in understanding and assessing our financial performance. Adjusted EBITDA should not be considered in isolation or as an alternative to, or substitute for, net income, cash flows generated by operations, investing or financing activities, or other financial statement data presented in the consolidated financial statements as indicators of financial performance or liquidity.
Adjusted EBITDA has limitations as an analytical tool and should not be considered in isolation or a substitute for analyzing our results as reported under GAAP. Some of the limitations are:
| ● | Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs; |
| ● | Adjusted EBITDA does not reflect our interest expense, or the requirements necessary to service interest or principal payments on our debt; |
| ● | Adjusted EBITDA does not reflect our income tax expenses or the cash requirements to pay our taxes; |
| ● | Adjusted EBITDA does not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments; and |
| ● | Although depreciation and amortization charges are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for such replacements. |
Revenue
Total revenue increased 11% to $167.4 million for the third quarter of 2019 compared with $151.4 million for the third quarter of 2018.
Environmental Services
Environmental Services segment revenue increased 14% to $122.2 million for the third quarter of 2019, compared to $107.2 million for the third quarter of 2018. T&D revenue increased 19% compared to the third quarter of 2018, comprised of an 11% increase in Base Business revenue and a 32% increase in project-based Event Business revenue. Transportation service revenue decreased 2% compared to the third quarter of 2018, reflecting less Event Business projects utilizing the Company’s transportation and logistics services. Total tons of waste disposed of or processed across all of our facilities increased 25% for the third quarter of 2019 compared to the third quarter of 2018, primarily reflecting incremental volumes disposed at our Winnie, Texas deep-well facility that was acquired in the fourth quarter of 2018 as well as a 10% increase in tons of waste disposed of or processed at our landfills for the third quarter of 2019 compared to the third quarter of 2018.
T&D revenue from recurring Base Business waste generators increased 11% for the third quarter of 2019 compared to the third quarter of 2018 and comprised 75% of total T&D revenue for the third quarter of 2019. During the third quarter of 2019, increases in Base Business T&D revenue from the transportation, broker/TSDF, chemical manufacturing, general manufacturing and government industry groups were partially offset by a decrease in Base Business T&D revenue from the metal manufacturing industry group.
T&D revenue from Event Business waste generators increased 32% for the third quarter of 2019 compared to the third quarter of 2018 and comprised 25% of total T&D revenue for the third quarter of 2019. During the third quarter of 2019, increases in Event Business T&D revenue from the transportation, metal manufacturing and government industry groups
36
were partially offset by a decrease in Event Business T&D revenue from the chemical manufacturing and “Other” industry groups.
The following table summarizes combined Base Business and Event Business T&D revenue growth, within the Environmental Services segment, by generator industry for the third quarter of 2019 as compared to the third quarter of 2018:
Field & Industrial Services
Field & Industrial Services segment revenue increased 2% to $45.2 million for the third quarter of 2019 compared with $44.2 million for the third quarter of 2018. The increase in Field & Industrial Services segment revenue is primarily attributable to higher Transportation and Logistics revenues and higher revenues from our Small Quantity Generation business line, partially offset by lower revenues from our Total Waste Management, Industrial Services and Remediation business lines.
Gross Profit
Total gross profit increased 20% to $56.5 million for the third quarter of 2019, up from $47.3 million for the third quarter of 2018. Total gross margin was 34% for the third quarter of 2019 compared with 31% for the third quarter of 2018.
Environmental Services
Environmental Services segment gross profit increased 24% to $49.4 million for the third quarter of 2019, up from $39.9 million for the third quarter of 2018. Total segment gross margin for the third quarter of 2019 was 40% compared with 37% for the third quarter of 2018. Gross profit for the third quarter of 2019 includes $2.6 million in business interruption insurance recoveries for lost profits related to the incident at our Grand View, Idaho facility in the fourth quarter of 2018. T&D gross margin was 47% for the third quarter of 2019 compared with 43% for the third quarter of 2018.
Field & Industrial Services
Field & Industrial Services segment gross profit decreased 3% to $7.2 million for the third quarter of 2019, down from $7.4 million for the third quarter of 2018. Total segment gross margin was 16% for the third quarter of 2019 compared with 17% for the third quarter of 2018.
Selling, General and Administrative Expenses (“SG&A”)
Total SG&A was $33.3 million, or 20% of total revenue, for the third quarter of 2019, up from $23.6 million, or 16% of total revenue, for the third quarter of 2018.
37
Environmental Services
Environmental Services segment SG&A increased 46% to $8.3 million, or 7% of segment revenue, for the third quarter of 2019 compared with $5.7 million, or 5% of segment revenue, for the third quarter of 2018, primarily reflecting higher losses on disposal of assets, higher insurance costs and higher intangible asset amortization expense, partially offset by property insurance recoveries recognized in the third quarter of 2019 related to the incident at our Grand View, Idaho facility in the fourth quarter of 2018.
Field & Industrial Services
Field & Industrial Services segment SG&A increased 36% to $3.8 million, or 8% of segment revenue, for the third quarter of 2019 compared with $2.8 million, or 6% of segment revenue, for the third quarter of 2018, primarily reflecting incremental costs associated with new facilities.
Corporate
Corporate SG&A was $21.2 million, or 13% of total revenue, for the third quarter of 2019 compared with $15.2 million, or 10% of total revenue, for the third quarter of 2018, primarily reflecting higher business development expenses and higher labor and incentive compensation costs in the third quarter of 2019 compared with the third quarter of 2018.
Components of Adjusted EBITDA
Income tax expense
Our effective income tax rate for the third quarter of 2019 was 33.0%, compared with 20.2% for the third quarter of 2018. The increase in the effective tax rate was primarily due to higher non-deductible expenses during the third quarter of 2019 compared to the third quarter of 2018. In addition, the Company implemented various one-time federal and state tax planning strategies in the third quarter of 2018 that favorably impacted the effective tax rate.
Interest expense
Interest expense was $3.9 million for the third quarter of 2019 compared with $3.1 million for the third quarter of 2018. The increase is the result of higher outstanding debt levels in the third quarter of 2019 primarily due to the acquisition of Ecoserv Industrial Disposal, LLC (“Winnie”) in November of 2018, as well as higher interest rates on the variable portion of our outstanding debt.
Foreign currency loss
We recognized a $90,000 foreign currency loss for the third quarter of 2019 compared with a $303,000 foreign currency loss for the third quarter of 2018. Foreign currency gains and losses reflect changes in business activity conducted in a currency other than the United States dollar (“USD”), our functional currency. Additionally, we established intercompany loans between our Canadian subsidiaries, whose functional currency is the Canadian dollar (“CAD”), and our parent company, US Ecology, as part of a tax and treasury management strategy allowing for repayment of third-party bank debt. These intercompany loans are payable by our Canadian subsidiaries to US Ecology in CAD requiring us to revalue the outstanding loan balance through our statements of operations based on USD/CAD currency movements from period to period. At September 30, 2019, we had $29.5 million of intercompany loans subject to currency revaluation.
Other income
Other income was $110,000 for the third quarter of 2019 compared with other income of $177,000 million for the third quarter of 2018.
38
Goodwill and intangible asset impairment charges
Based on the results of our 2018 interim assessment of the goodwill, indefinite-lived intangible assets and finite-lived tangible and intangible assets of our Mobile Recycling reporting unit, which is part of our Environmental Services segment, we recorded impairment charges of $3.7 million in the third quarter of 2018.
Depreciation and amortization of plant and equipment
Depreciation and amortization expense was $9.4 million for the third quarter of 2019 compared with $7.3 million for the third quarter of 2018, primarily reflecting additional depreciation expense on assets placed in service in late 2018 and the first nine months of 2019, including assets associated with the ES&H of Dallas, LLC (“ES&H Dallas”), Winnie and W.I.S.E. Environmental Services Inc. (“US Ecology Sarnia”) acquisitions.
Amortization of intangible assets
Intangible assets amortization expense was $2.9 million for the third quarter of 2019 compared with $2.3 million for the third quarter of 2018, primarily reflecting additional amortization of intangible assets recorded as a result of the ES&H Dallas and Winnie acquisitions in the third and fourth quarter of 2018, respectively.
Share-based compensation
Share-based compensation expense was $1.2 million for the third quarter of both 2019 and 2018.
Accretion and non-cash adjustment of closure and post-closure liabilities
Accretion and non-cash adjustment of closure and post-closure liabilities was $1.1 million for the third quarter of both 2019 and 2018.
Property insurance recoveries
The Company recognized property-related insurance recoveries of $498,000 in the third quarter of 2019 related to the incident at our Grand View, Idaho facility in the fourth quarter of 2018.
39
NINE MONTHS ENDED SEPTEMBER 30, 2019 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2018
Operating results and percentage of revenues were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
2019 vs. 2018 |
|
|||||||||||
|
$s in thousands |
|
2019 |
|
% |
|
2018 |
|
% |
|
$ Change |
|
% Change |
|
|||
|
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Environmental Services |
|
$ |
327,389 |
|
72 |
% |
$ |
292,628 |
|
72 |
% |
$ |
34,761 |
|
12 |
% |
|
Field & Industrial Services |
|
|
126,852 |
|
28 |
% |
|
115,759 |
|
28 |
% |
|
11,093 |
|
10 |
% |
|
Total |
|
|
454,241 |
|
100 |
% |
|
408,387 |
|
100 |
% |
|
45,854 |
|
11 |
% |
|
Gross Profit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Environmental Services |
|
|
123,999 |
|
38 |
% |
|
108,281 |
|
37 |
% |
|
15,718 |
|
15 |
% |
|
Field & Industrial Services |
|
|
17,365 |
|
14 |
% |
|
16,138 |
|
14 |
% |
|
1,227 |
|
8 |
% |
|
Total |
|
|
141,364 |
|
31 |
% |
|
124,419 |
|
30 |
% |
|
16,945 |
|
14 |
% |
|
Selling, General & Administrative Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Environmental Services |
|
|
11,748 |
|
4 |
% |
|
16,926 |
|
6 |
% |
|
(5,178) |
|
(31) |
% |
|
Field & Industrial Services |
|
|
10,880 |
|
9 |
% |
|
7,470 |
|
6 |
% |
|
3,410 |
|
46 |
% |
|
Corporate |
|
|
55,055 |
|
n/m |
|
|
42,641 |
|
n/m |
|
|
12,414 |
|
29 |
% |
|
Total |
|
|
77,683 |
|
17 |
% |
|
67,037 |
|
16 |
% |
|
10,646 |
|
16 |
% |
|
Adjusted EBITDA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Environmental Services |
|
|
133,725 |
|
41 |
% |
|
117,742 |
|
40 |
% |
|
15,983 |
|
14 |
% |
|
Field & Industrial Services |
|
|
13,424 |
|
11 |
% |
|
13,143 |
|
11 |
% |
|
281 |
|
2 |
% |
|
Corporate |
|
|
(50,728) |
|
n/m |
|
|
(39,073) |
|
n/m |
|
|
(11,655) |
|
30 |
% |
|
Total |
|
$ |
96,421 |
|
21 |
% |
$ |
91,812 |
|
22 |
% |
$ |
4,609 |
|
5 |
% |
Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization (“Adjusted EBITDA”)
Management uses Adjusted EBITDA as a financial measure to assess segment performance. Adjusted EBITDA is defined as net income before interest expense, interest income, income tax expense, depreciation, amortization, share-based compensation, accretion of closure and post-closure liabilities, foreign currency gain/loss, non-cash property and equipment impairment charges, non-cash goodwill and intangible asset impairment charges, property insurance recoveries and other income/expense. The reconciliation of Net income to Adjusted EBITDA is as follows:
Adjusted EBITDA is a complement to results provided in accordance with GAAP and we believe that such information provides additional useful information to analysts, stockholders and other users to understand the Company’s operating
40
performance. Since Adjusted EBITDA is not a measurement determined in accordance with GAAP and is thus susceptible to varying calculations, Adjusted EBITDA as presented may not be comparable to other similarly titled measures of other companies. Items excluded from Adjusted EBITDA are significant components in understanding and assessing our financial performance. Adjusted EBITDA should not be considered in isolation or as an alternative to, or substitute for, net income, cash flows generated by operations, investing or financing activities, or other financial statement data presented in the consolidated financial statements as indicators of financial performance or liquidity.
Adjusted EBITDA has limitations as an analytical tool and should not be considered in isolation or a substitute for analyzing our results as reported under GAAP. Some of the limitations are:
| ● | Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs; |
| ● | Adjusted EBITDA does not reflect our interest expense, or the requirements necessary to service interest or principal payments on our debt; |
| ● | Adjusted EBITDA does not reflect our income tax expenses or the cash requirements to pay our taxes; |
| ● | Adjusted EBITDA does not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments; and |
| ● | Although depreciation and amortization charges are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for such replacements. |
Revenue
Total revenue increased 11% to $454.2 million for the first nine months of 2019 compared with $408.4 million for the first nine months of 2018.
Environmental Services
Environmental Services segment revenue increased 12% to $327.4 million for the first nine months of 2019, compared to $292.6 million for the first nine months of 2018. T&D revenue increased 14% compared to the first nine months of 2018, comprised of an 8% increase in Base Business revenue and a 24% increase in project-based Event Business revenue. Transportation service revenue increased 4% compared to the first nine months of 2018, reflecting more Event Business projects utilizing the Company’s transportation and logistics services. Total tons of waste disposed of or processed across all of our facilities increased 30% for the first nine months of 2019 compared to the first nine months of 2018, primarily reflecting incremental volumes disposed at our Winnie, Texas deep-well facility that was acquired in the fourth quarter of 2018 as well as a 9% increase in tons of waste disposed of or processed at our landfills for the first nine months of 2019 compared to the first nine months of 2018.
T&D revenue from recurring Base Business waste generators increased 8% for the first nine months of 2019 compared to the first nine months of 2018 and comprised 78% of total T&D revenue for the first nine months of 2019. During the first nine months of 2019, increases in Base Business T&D revenue from the broker/TSDF, transportation, general manufacturing, “Other” and government industry groups were partially offset by a decrease in Base Business T&D revenue from the waste management & remediation industry group.
T&D revenue from Event Business waste generators increased 24% for the first nine months of 2019 compared to the first nine months of 2018 and comprised 22% of total T&D revenue for the first nine months of 2019. During the first nine months of 2019, increases in Event Business T&D revenue from the government, chemical manufacturing, metal manufacturing and transportation industry groups were partially offset by a decrease in Event Business T&D revenue from the “Other”, refining and waste management & remediation industry groups.
41
The following table summarizes combined Base Business and Event Business T&D revenue growth, within the Environmental Services segment, by generator industry for the first nine months of 2019 as compared to the first nine months of 2018:
Field & Industrial Services
Field & Industrial Services segment revenue increased 10% to $126.9 million for the first nine months of 2019 compared with $115.8 million for the first nine months of 2018. The increase in Field & Industrial Services segment revenue is primarily attributable to higher Transportation and Logistics revenues, growth in our Emergency Response business line primarily as a result of our acquisition of ES&H Dallas in the third quarter of 2018, higher revenues from our Small Quantity Generation business line and higher Industrial Services revenues, partially offset by lower revenues from our Remediation and Total Waste Management business lines.
Gross Profit
Total gross profit increased 14% to $141.4 million for the first nine months of 2019, up from $124.4 million for the first nine months of 2018. Total gross margin was 31% for the first nine months of 2019 compared with 30% for the first nine months of 2018.
Environmental Services
Environmental Services segment gross profit increased 15% to $124.0 million for the first nine months of 2019, up from $108.3 million for the first nine months of 2018. Total segment gross margin for the first nine months of 2019 was 38% compared with 37% for the first nine months of 2018. Gross profit for the first nine months of 2019 includes $4.8 million in business interruption insurance recoveries for lost profits related to hurricane damage at our Robstown, Texas facility in 2017 and the incident at our Grand View, Idaho facility in the fourth quarter of 2018. T&D gross margin was 44% for the first nine months of 2019 compared with 42% for the first nine months of 2018.
Field & Industrial Services
Field & Industrial Services segment gross profit increased 8% to $17.4 million for the first nine months of 2019, up from $16.1 million for the first nine months of 2018. Total segment gross margin was 14% for the first nine months of both 2019 and 2018.
Selling, General and Administrative Expenses (“SG&A”)
Total SG&A was $77.7 million, or 17% of total revenue, for the first nine months of 2019, up from $67.0 million, or 16% of total revenue, for the first nine months of 2018.
42
Environmental Services
Environmental Services segment SG&A decreased 31% to $11.7 million, or 4% of segment revenue, for the first nine months of 2019 compared with $16.9 million, or 6% of segment revenue, for the first nine months of 2018, primarily reflecting property insurance recoveries of $9.7 million recognized in the first nine months of 2019 related to the incident at our Grand View, Idaho facility in the fourth quarter of 2018, partially offset by higher insurance costs, higher intangible asset amortization expense, higher losses on disposal of assets and higher labor and incentive compensation costs.
Field & Industrial Services
Field & Industrial Services segment SG&A increased 46% to $10.9 million, or 9% of segment revenue, for the first nine months of 2019 compared with $7.5 million, or 6% of segment revenue, for the first nine months of 2018, primarily reflecting incremental costs associated with new facilities.
Corporate
Corporate SG&A was $55.1 million, or 12% of total revenue, for the first nine months of 2019 compared with $42.6 million, or 10% of total revenue, for the first nine months of 2018, primarily reflecting higher business development expenses, higher labor and incentive compensation costs and higher information technology related expenses in the first nine months of 2019 compared with the first nine months of 2018.
Components of Adjusted EBITDA
Income tax expense
Our effective income tax rate for the first nine months of 2019 was 30.2%, compared with 23.7% for the first nine months of 2018. The increase in the effective tax rate was primarily due to higher non-deductible expenses during the first nine months of 2019 compared to the first nine months of 2018. In addition, the Company implemented various one-time federal and state tax planning strategies in the third quarter of 2018 that favorably impacted the effective tax rate.
Interest expense
Interest expense was $11.5 million for the first nine months of 2019 compared with $8.8 million for the first nine months of 2018. The increase is the result of higher outstanding debt levels in the first nine months of 2019 primarily due to the acquisition of Winnie in November of 2018, as well as higher interest rates on the variable portion of our outstanding debt.
Foreign currency loss
We recognized a $613,000 foreign currency loss for the first nine months of 2019 compared with a $456,000 foreign currency loss for the first nine months of 2018. Foreign currency gains and losses reflect changes in business activity conducted in a currency other than the United States dollar (“USD”), our functional currency. Additionally, we established intercompany loans between our Canadian subsidiaries, whose functional currency is the Canadian dollar (“CAD”), and our parent company, US Ecology, as part of a tax and treasury management strategy allowing for repayment of third-party bank debt. These intercompany loans are payable by our Canadian subsidiaries to US Ecology in CAD requiring us to revalue the outstanding loan balance through our statements of operations based on USD/CAD currency movements from period to period. At September 30, 2019, we had $29.5 million of intercompany loans subject to currency revaluation.
Other income
Other income was $342,000 for the first nine months of 2019 compared with other income of $2.5 million for the first nine months of 2018. Other income for the first nine months of 2018 includes a $2.0 million gain on the issuance of a property easement on a portion of unutilized Company-owned land at one of our operating facilities.
43
Goodwill and intangible asset impairment charges
Based on the results of our 2018 interim assessment of the goodwill, indefinite-lived intangible assets and finite-lived tangible and intangible assets of our Mobile Recycling reporting unit, which is part of our Environmental Services segment, we recorded impairment charges of $3.7 million in the third quarter of 2018.
Depreciation and amortization of plant and equipment
Depreciation and amortization expense was $26.7 million for the first nine months of 2019 compared with $21.0 million for the first nine months of 2018, primarily reflecting additional depreciation expense on assets placed in service in late 2018 and the first nine months of 2019, including assets associated with the ES&H Dallas, Winnie and US Ecology Sarnia acquisitions.
Amortization of intangible assets
Intangible assets amortization expense was $8.6 million for the first nine months of 2019 compared with $6.9 million for the first nine months of 2018, primarily reflecting additional amortization of intangible assets recorded as a result of the ES&H Dallas and Winnie acquisitions in the third and fourth quarter of 2018, respectively.
Share-based compensation
Share-based compensation expense was $3.7 million for the first nine months of 2019 compared with $3.3 million for the first nine months 2018 as a result of an increase in equity-based awards granted to employees.
Accretion and non-cash adjustment of closure and post-closure liabilities
Accretion and non-cash adjustment of closure and post-closure liabilities was $3.4 million for the first nine months of 2019 compared with $3.2 for the first nine months of 2018.
Property insurance recoveries
The Company recognized property-related insurance recoveries of $9.7 million in the first nine months of 2019 related to the incident at our Grand View, Idaho facility in the fourth quarter of 2018.
44
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, 2018, other than the adoption of the Accounting Standards Codification Topic 842, Leases, described in Note 1 and Note 9 of the Notes to Consolidated Financial Statements in “Part I, Item 1. Financial Statements (Unaudited)” of this Quarterly Report on Form 10-Q.
RECENTLY ISSUED ACCOUNTING STANDARDS
For information about recently issued accounting standards, see Note 1 of the Notes to Consolidated Financial Statements in “Part I, Item 1. Financial Statements (Unaudited)” of this Quarterly Report on Form 10-Q.
LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of liquidity are cash and cash equivalents, cash generated from operations and borrowings under the 2017 Credit Agreement entered into on April 18, 2017. At September 30, 2019, we had $21.1 million in cash and cash equivalents immediately available and $138.7 million of borrowing capacity available under the 2017 Credit Agreement. We assess our liquidity in terms of our ability to generate cash to fund our operating, investing and financing activities. Our primary ongoing cash requirements are funding operations, capital expenditures, paying interest on our long-term debt, and paying declared dividends pursuant to our dividend policy. We believe future operating cash flows will be sufficient to meet our future operating, investing and dividend cash needs for the foreseeable future. Furthermore, existing cash balances and availability of additional borrowings under the 2017 Credit Agreement provide additional sources of liquidity should they be required.
Operating Activities
For the nine months ended September 30, 2019, net cash provided by operating activities was $64.0 million. This primarily reflects net income of $36.6 million, non-cash depreciation, amortization and accretion of $38.7 million, deferred income taxes of $3.9 million and share-based compensation of $3.7 million, partially offset by a $9.7 million gain on insurance proceeds from damaged property and equipment and an increase in other assets of $7.2 million. Impacts on net income are due to the factors discussed above under “Results of Operations.” Changes in deferred income taxes are primarily attributable to deferred tax gains resulting from involuntary conversions related to the incident at our Grand View, Idaho facility in the fourth quarter of 2018. We recognized property-related insurance recoveries in the first nine months of 2019 related to the incident at our Grand View, Idaho facility in the fourth quarter of 2018. The increase in other assets is primarily attributable to prepaid insurance costs associated with our annual renewal process.
Days sales outstanding were 85 days as of September 30, 2019, compared to 77 days as of December 31, 2018 and 76 days as of September 30, 2018.
For the nine months ended September 30, 2018, net cash provided by operating activities was $55.5 million. This primarily reflects net income of $35.9 million, non-cash depreciation, amortization and accretion of $31.2 million, an increase in accounts payable and accrued liabilities of $12.8 million, deferred income taxes of $4.7 million, non-cash impairment charges of $3.7 million, and share-based compensation of $3.3 million, partially offset by an increase in accounts receivable of $27.6 million and an increase in income taxes receivable of $7.9 million. Impacts on net income are due to the factors discussed above under “Results of Operations.” The increase in accounts payable and accrued liabilities is primarily attributable to the timing of payments to vendors for products and services. Changes in deferred income taxes and income taxes receivable are primarily attributable to the implementation of various federal and state tax planning strategies, as well as the timing of income tax payments. The increase in receivables is primarily attributable to the timing of customer payments.
45
Investing Activities
For the nine months ended September 30, 2019, net cash used in investing activities was $53.7 million, primarily related to capital expenditures of $38.4 million, the acquisition of US Ecology Sarnia for $17.9 million and a $7.9 million investment in the preferred stock of a privately held company, partially offset by property insurance proceeds of $10.0 million related to the incident at our Grand View, Idaho facility in the fourth quarter of 2018. Significant capital projects included construction of additional disposal capacity at our Belleville, Michigan; Robstown, Texas; and Blainville, Quebec, Canada facilities as well as equipment purchases and infrastructure upgrades at our corporate and operating facilities.
For the nine months ended September 30, 2018, net cash used in investing activities was $46.8 million, primarily related to capital expenditures of $25.8 million and the acquisition of ES&H Dallas for $21.3 million. Significant capital projects included continuing construction of additional disposal capacity and railway expansion at our Blainville, Quebec, Canada location and equipment purchases and infrastructure upgrades at our corporate and operating facilities.
Financing Activities
For the nine months ended September 30, 2019, net cash used in financing activities was $21.9 million, consisting primarily of $30.0 million in payments on our revolving credit facility and dividend payments to our stockholders of $11.9 million, partially offset by $20.0 million in proceeds under our revolving credit facility associated with the acquisition of US Ecology Sarnia.
For the nine months ended September 30, 2018, net cash used in financing activities was $10.1 million, consisting primarily of dividend payments to our stockholders of $11.8 million, partially offset by $2.4 million in proceeds received from the exercise of stock options.
2017 Credit Agreement
The 2017 Credit Agreement provides for a $500.0 million, five-year revolving credit facility (the “Revolving Credit Facility”), including a $75.0 million sublimit for the issuance of standby letters of credit and a $25.0 million sublimit for the issuance of swingline loans used to fund short-term working capital requirements. The 2017 Credit Agreement also contains an accordion feature whereby the Company may request up to $200.0 million of additional funds through an increase to the Revolving Credit Facility, through incremental term loans, or some combination thereof. As described below, the 2017 Credit Agreement was amended in November 2019 in connection with the Mergers. In addition, as a result of the consummation of the Mergers, the borrower under the 2017 Credit Facility is Predecessor US Ecology, a wholly-owned subsidiary of the Company.
Proceeds from the Revolving Credit Facility are restricted solely for working capital and other general corporate purposes (including acquisitions and capital expenditures). Under the Revolving Credit Facility, revolving credit loans are available based on a base rate (as defined in the 2017 Credit Agreement) or LIBOR, at the Company’s option, plus an applicable margin which is determined according to a pricing grid under which the interest rate decreases or increases based on our ratio of funded debt to consolidated earnings before interest, taxes, depreciation and amortization (as defined in the 2017 Credit Agreement).
At September 30, 2019, the effective interest rate on the Revolving Credit Facility, including the impact of our interest rate swap, was 3.62%. Interest only payments are due either quarterly or on the last day of any interest period, as applicable. In October 2014, the Company entered into an interest rate swap agreement, effectively fixing the interest rate on $155.0 million, or 44%, of the Revolving Credit Facility borrowings as of September 30, 2019.
The Company is required to pay a commitment fee ranging from 0.175% to 0.35% on the average daily unused portion of the Revolving Credit Facility, with such commitment fee to be reduced based upon the Company’s total net leverage ratio (as defined in the 2017 Credit Agreement). The maximum letter of credit capacity under the Revolving Credit Facility is $75.0 million and the 2017 Credit Agreement provides for a letter of credit fee equal to the applicable margin for LIBOR loans under the Revolving Credit Facility. At September 30, 2019, there were $354.0 million of borrowings outstanding
46
on the Revolving Credit Facility. These borrowings are due on the revolving credit maturity date (as defined in the 2017 Credit Agreement) and presented as long-term debt in the consolidated balance sheets.
The Company has entered into a sweep arrangement whereby day-to-day cash requirements in excess of available cash balances are advanced to the Company on an as-needed basis with repayments of these advances automatically made from subsequent deposits to our cash operating accounts (the “Sweep Arrangement”). Total advances outstanding under the Sweep Arrangement are subject to the $25.0 million swingline loan sublimit under the Revolving Credit Facility. The Company’s revolving credit loans outstanding under the Revolving Credit Facility are not subject to repayment through the Sweep Arrangement. As of September 30, 2019, there were $1.5 million in borrowings outstanding subject to the Sweep Arrangement, which are presented as Short-term borrowings in the consolidated balance sheet.
As of September 30, 2019, the availability under the Revolving Credit Facility was $138.7 million with $5.7 million of the Revolving Credit Facility issued in the form of standby letter of credit utilized as collateral for closure and post-closure financial assurance and other assurance obligations.
Amendments to the 2017 Credit Agreement
On August 6, 2019, Predecessor US Ecology entered into the first amendment (the “First Amendment”) to the 2017 Credit Agreement, by and among Predecessor US Ecology, the subsidiaries of Predecessor US Ecology party thereto, the lenders referred to therein and Wells Fargo Bank, National Association (“Wells Fargo”), as issuing lender, swingline lender and administrative agent. Effective November 1, 2019, the First Amendment, among other things, extended the expiration of the Revolving Credit Facility to November 1, 2024, permitted the issuance of a $400.0 million incremental term loan to be used to refinance existing indebtedness of NRCG and pay related transaction expenses in connection with the Mergers, modified the accordion feature allowing the Company to request up to the greater of (x) $250.0 million and (y) 100% of consolidated EBITDA plus certain additional amounts, increased the sublimit for the issuance of swingline loans to $40.0 million and increased the maximum consolidated total net leverage ratio to 4.00 to 1.00.
On November 1, 2019, Predecessor US Ecology entered into the lender joinder agreement and second amendment (the “Second Amendment”) to the 2017 Credit Agreement. Effective November 1, 2019, the Second Amendment, among other things, amended the 2017 Credit Agreement to increase the capacity for incremental term loans by $50.0 million and provided for Wells Fargo lending $450.0 million in incremental term loans to Predecessor US Ecology to pay off the existing debt of NRCG in connection with the Mergers, to pay certain fees, costs and expenses incurred in connection with the Mergers and to repay outstanding borrowings under the Revolving Credit Facility. The seven-year incremental term loan matures November 1, 2026, requires principal repayment of 1% annually, and bears interest at LIBOR plus 2.25% or a base rate plus 1.25% (with a step-up to LIBOR plus 2.50% or a base rate plus 1.50% in the event that US Ecology credit ratings are not BB (with a stable or better outlook) or better from S&P and Ba2 (with a stable or better outlook) or better from Moody’s)
For additional information see Note 11 and Note 18 of the Notes to Consolidated Financial Statements in “Part I, Item 1. Financial Statements (Unaudited)” of this Quarterly Report on Form 10-Q
CONTRACTUAL OBLIGATIONS AND GUARANTEES
Except for the First Amendment, there were no material changes in the amounts of our contractual obligations and guarantees during the nine months ended September 30, 2019. For further information on our contractual obligations and guarantees, refer to our Annual Report on Form 10-K for the fiscal year ended December 31, 2018. For additional information see Note 11 of the Notes to Consolidated Financial Statements in “Part I, Item 1. Financial Statements (Unaudited)” of this Quarterly Report on Form 10-Q
47
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
We do not maintain equities, commodities, derivatives, or any other similar instruments for trading purposes. We have minimal interest rate risk on investments or other assets due to our preservation of capital approach to investments. At September 30, 2019, $5.0 million of restricted cash was invested in fixed-income U.S. Treasury and U.S. government agency securities and money market accounts.
We are exposed to changes in interest rates as a result of our borrowings under the 2017 Credit Agreement. Under the 2017 Credit Agreement, Revolving Credit Facility borrowings incur interest at a base rate (as defined in the 2017 Credit Agreement) or LIBOR, at the Company’s option, plus an applicable margin which is determined according to a pricing grid under which the interest rate decreases or increases based on our ratio of funded debt to consolidated earnings before interest, taxes, depreciation and amortization (as defined in the 2017 Credit Agreement). On October 29, 2014, the Company entered into an interest rate swap agreement with the intention of hedging the Company’s interest rate exposure on a portion of the Company’s outstanding LIBOR-based variable rate debt. Under the terms of the swap, the Company pays interest at the fixed effective rate of 3.67% and receives interest at the variable one-month LIBOR rate on an initial notional amount of $250.0 million.
As of September 30, 2019, there were $354.0 million of revolving loans outstanding under the 2017 Credit Agreement. If interest rates were to rise and outstanding balances remain unchanged, we would be subject to higher interest payments on our outstanding debt. Subsequent to the effective date of the interest rate swap on December 31, 2014, we are subject to higher interest payments on only the unhedged borrowings under the 2017 Credit Agreement.
Based on the outstanding indebtedness of $354.0 million under the 2017 Credit Agreement at September 30, 2019 and the impact of our interest rate hedge, if market rates used to calculate interest expense were to average 1% higher in the next twelve months, our interest expense would increase by approximately $2.1 million for the corresponding period.
Foreign Currency Risk
We are subject to currency exposures and volatility because of currency fluctuations. The majority of our transactions are in USD; however, our Canadian subsidiaries conduct business in both Canada and the United States. In addition, contracts for services that our Canadian subsidiaries provide to U.S. customers are generally denominated in USD. During the nine months ended September 30, 2019, our Canadian subsidiaries transacted approximately 71% of their revenue in USD and at any time have cash on deposit in USD and outstanding USD trade receivables and payables related to these transactions. These USD cash, receivable and payable accounts are subject to non-cash foreign currency translation gains or losses. Exchange rate movements also affect the translation of Canadian generated profits and losses into USD.
We established intercompany loans between our Canadian subsidiaries and our parent company, US Ecology, as part of a tax and treasury management strategy allowing for repayment of third-party bank debt. These intercompany loans are payable using CAD and are subject to mark-to-market adjustments with movements in the CAD. At September 30, 2019, we had $29.5 million of intercompany loans outstanding between our Canadian subsidiaries and US Ecology. During the nine months ended September 30, 2019, the CAD strengthened as compared to the USD resulting in a $471,000 non-cash foreign currency translation gain being recognized in the Company’s consolidated statements of operations related to the intercompany loans. Based on intercompany balances as of September 30, 2019, a $0.01 CAD increase or decrease in currency rate compared to the USD at September 30, 2019 would have generated a gain or loss of approximately $295,000 for the nine months ended September 30, 2019.
We had a total pre-tax foreign currency loss of $613,000 for the nine months ended September 30, 2019. 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.
48
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 September 30, 2019. 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 Securities and Exchange Commission (“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.
SEC guidance permits management to omit an assessment of an acquired business’ internal control over financial reporting from management’s assessment of internal control over financial reporting for a period not to exceed one year from the date of acquisition. Accordingly, we have assessed neither Winnie’s nor US Ecology Sarnia’s internal control over financial reporting as of September 30, 2019.
49
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 an accident at one of our facilities, incidents resulting from the handling of dangerous substances, the loss or failure to renew significant contracts, competition in our markets, adverse economic conditions, our compliance with applicable laws and regulations, the realization of anticipated benefits from acquired operations, our ability to perform under required contracts, limitations on our available cash flow as a result of our indebtedness, liabilities arising from our participation in multi-employer pension plans, cyber security threats, unanticipated changes in tax rules and regulations, loss of key personnel, a deterioration in our labor relations or labor disputes, our ability to pay dividends or repurchase stock, anti-takeover regulations, stock market volatility, our access to insurance, surety bonds and other financial assurances, our litigation risk not covered by insurance, the replacement of non-recurring event projects, our ability to permit and contract for timely construction of new or expanded disposal space, renewals of our operating permits or lease agreements with regulatory bodies, our ability or the timing of reconstructing and receiving regulatory approvals for the reopening of the Grand View, Idaho treatment facility, the timing or amount of insurance recoveries associated with the reconstruction and business interruption losses for the Grand View, Idaho treatment facility, our access to cost-effective transportation services, lawsuits, our implementation of new technologies, fluctuations in foreign currency markets and foreign affairs.
Except as required by applicable law, including the securities laws of the United States and the rules and regulations of 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 our Form 10-K for the fiscal year ended December 31, 2018 and in other reports we file with the SEC 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.
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ITEM 1. LEGAL PROCEEDINGS
On November 17, 2018, an explosion occurred at our Grand View, Idaho facility, resulting in one employee fatality and injuries to other employees. The incident severely damaged the facility’s primary waste-treatment building as well as surrounding waste handling, waste storage, maintenance and administrative support structures, resulting in the closure of the entire facility that remained in effect through January 2019. We resumed landfill operations at our Grand View, Idaho facility in first quarter of 2019 and resumed operations of our secondary waste-treatment facility in the second quarter of 2019. Reconstruction of the primary waste-treatment building is currently underway. In addition to conducting our own investigation into the incident, we are fully cooperating with government agencies, including IDEQ and the USEPA to support their comprehensive and independent investigations of the incident. We cannot presently estimate the potential liability related to the incident and, therefore, no amounts related to such claims have been recorded in our financial statements as of September 30, 2019. We have not been named as a defendant in any civil action relating to the incident. As a result of the OSHA’s inspection following the incident, OSHA issued a Citation and Notification of Penalty on May 6, 2019. We are currently contesting the Citation and Notification of Penalty before the Occupational Safety and Health Review Commission and the contested penalty is not material. We maintain workers’ compensation insurance, business interruption insurance and liability insurance for personal injury, property and casualty damage. We believe that any potential third-party claims associated with the explosion, in excess of our deductibles, are expected to be resolved primarily through our insurance policies. Although we carry business interruption insurance, a disruption of our business caused by a casualty event, including the full and partial closure of our Grand View, Idaho facility, may result in the loss of business, profits or customers during the time of such closure. Accordingly, our insurance policies may not fully compensate us for these losses.
Other than described above, during the period covered by this Quarterly Report on Form 10-Q, we have not been a party to any material legal proceedings.
ITEM 1A. RISK FACTORS
The Company is subject to various risks and uncertainties that could have a material impact on our business, financial condition, results of operations and cash flows. The discussion of these risk factors is included in Part I, Item 1A of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018 and there have been no material changes from the risk factors reported on the Form 10-K and other factors described under “Risk Factors” and “Cautionary Statements Regarding Forward-looking Statements” in the Form S-4 (Registration Statement No. 333-232930, initially filed with the SEC, on August 1, 2019.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On June 1, 2016, Predecessor US Ecology’s Board of Directors authorized the repurchase of $25.0 million of the Company’s outstanding common stock. Repurchases may be made from time to time in open market or through privately negotiated transactions. The timing of any repurchases will be based upon prevailing market conditions and other factors. The Company did not repurchase any shares of common stock under the repurchase program during the nine months ended September 30, 2019. On May 29, 2018 the repurchase program was extended and will remain in effect until June 6, 2020, unless further extended by our Board of Directors.
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The following table summarizes the purchases of shares of our common stock during the nine months ended September 30, 2019:
| (1) | Represents shares surrendered or forfeited in connection with certain employees’ tax withholding obligations related to the vesting of shares of restricted stock and performance stock units. |
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
None.
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ITEM 6. EXHIBITS
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10.1 |
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15 |
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31.1 |
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Certification of CEO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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31.2 |
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Certification of CFO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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32 |
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101 |
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The following materials from the quarterly report on Form 10-Q of US Ecology, Inc. for the quarter ended September 30, 2019 formatted in inline 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 |
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104 |
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The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2019, formatted in inline XBRL |
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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.
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US Ecology, Inc. |
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(Registrant) |
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Date: November 4, 2019 |
/s/ Eric L. Gerratt |
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Eric L. Gerratt |
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Executive Vice President, Chief Financial Officer and Treasurer |
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