UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2020
or
☐ | TRANSITION REPORT PURSUANT TO Section 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to .
Commission file number: 001-39120
US ECOLOGY, INC.
(Exact name of registrant as specified in its charter)
| ||
Delaware | | 84-2421185 |
(State or other jurisdiction of incorporation or | | (I.R.S. Employer Identification No.) |
organization) | | |
| | |
101 S. Capitol Blvd., Suite 1000 | | |
Boise, Idaho | | 83702 |
(Address of principal executive offices) | | (Zip Code) |
Registrant’s telephone number, including area code: (208) 331-8400
Securities registered pursuant to Section 12(b) of the Act:
| | |
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock, par value $0.01 per share | ECOL | Nasdaq Global Select Market |
Warrants to Purchase Common Stock | ECOLW | Nasdaq Capital 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.
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 August 4, 2020, there were 31,509,734 shares of the registrant’s Common Stock outstanding.
US ECOLOGY, INC.
FORM 10-Q
TABLE OF CONTENTS
| | | ||
Item | |
| Page | |
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| | | ||
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| 3 | |||
| | | | |
| Consolidated Balance Sheets as of June 30, 2020 and December 31, 2019 | | 3 | |
| | | | |
| Consolidated Statements of Operations for the three and six months ended June 30, 2020 and 2019 | | 4 | |
| | | | |
| | 5 | ||
| | | | |
| Consolidated Statements of Cash Flows for the six months ended June 30, 2020 and 2019 | | 6 | |
| | | | |
| | 7 | ||
| | | | |
| | 8 | ||
| | | | |
| | 35 | ||
| | | | |
Management’s Discussion and Analysis of Financial Condition and Results of Operations | | 36 | ||
| 57 | |||
| 58 | |||
| | | | |
| | | ||
| | | | |
| | 60 | ||
| 61 | |||
| 62 | |||
| 62 | |||
| 63 | |||
| 63 | |||
| 63 | |||
| 64 | |||
| | 65 |
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
US ECOLOGY, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except par value amount)
| | | | | | |
|
| June 30, 2020 |
| December 31, 2019 | ||
Assets | | | | | | |
Current Assets: | | | | | | |
Cash and cash equivalents | | $ | 122,521 | | $ | 41,281 |
Receivables, net | |
| 211,181 | |
| 255,310 |
Prepaid expenses and other current assets | |
| 30,524 | |
| 25,136 |
Income taxes receivable | | | 10,842 | | | 11,244 |
Total current assets | |
| 375,068 | |
| 332,971 |
| | | | | | |
Property and equipment, net | |
| 483,578 | |
| 478,768 |
Operating lease assets | | | 52,202 | | | 57,396 |
Restricted cash and investments | |
| 5,172 | |
| 5,069 |
Intangible assets, net | |
| 555,973 | |
| 574,902 |
Goodwill | |
| 469,278 | |
| 766,980 |
Other assets | |
| 14,878 | |
| 15,158 |
Total assets | | $ | 1,956,149 | | $ | 2,231,244 |
| | | | | | |
Liabilities and Stockholders’ Equity | | | | | | |
Current Liabilities: | | | | | | |
Accounts payable | | $ | 38,048 | | $ | 46,906 |
Deferred revenue | |
| 19,258 | |
| 14,788 |
Accrued liabilities | |
| 38,759 | |
| 65,869 |
Accrued salaries and benefits | |
| 24,786 | |
| 29,653 |
Income taxes payable | |
| 2,572 | |
| 726 |
Short-term borrowings | | | 3,978 | | | — |
Current portion of long-term debt | | | 3,359 | | | 3,359 |
Current portion of closure and post-closure obligations | |
| 3,374 | |
| 2,152 |
Current portion of operating lease liabilities | | | 17,312 | | | 17,317 |
Total current liabilities | |
| 151,446 | |
| 180,770 |
| | | | | | |
Long-term debt | |
| 854,163 | |
| 765,842 |
Long-term closure and post-closure obligations | |
| 84,672 | |
| 84,231 |
Long-term operating lease liabilities | | | 35,121 | | | 39,954 |
Other long-term liabilities | |
| 35,164 | |
| 20,722 |
Deferred income taxes, net | |
| 122,636 | |
| 128,345 |
Total liabilities | |
| 1,283,202 | |
| 1,219,864 |
| | | | | | |
Commitments and contingencies (See Note 16) | | | | | | |
| | | | | | |
Stockholders’ Equity: | | | | | | |
Common stock $0.01 par value per share, 50,000 authorized; 31,139 and 31,461 shares issued and outstanding, respectively | |
| 315 | |
| 315 |
Additional paid-in capital | |
| 817,557 | |
| 816,345 |
Retained (deficit) earnings | |
| (102,362) | |
| 206,574 |
Treasury stock, at cost, 370 and 0 shares, respectively | |
| (16,366) | |
| — |
Accumulated other comprehensive loss | |
| (26,197) | |
| (11,854) |
Total stockholders’ equity | |
| 672,947 | |
| 1,011,380 |
Total liabilities and stockholders’ equity | | $ | 1,956,149 | | $ | 2,231,244 |
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)
| | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, | ||||||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 | ||||
Revenue | | $ | 213,918 | | $ | 155,802 | | $ | 454,638 | | $ | 286,839 |
Direct operating costs | |
| 160,107 | |
| 106,219 | |
| 339,705 | |
| 202,015 |
Gross profit | |
| 53,811 | |
| 49,583 | |
| 114,933 | |
| 84,824 |
Selling, general and administrative expenses | |
| 48,487 | |
| 24,049 | |
| 99,545 | |
| 44,354 |
Goodwill impairment charges | | | — | | | — | | | 300,300 | | | — |
Operating income (loss) | |
| 5,324 | |
| 25,534 | |
| (284,912) | |
| 40,470 |
Other income (expense): | | | | | | | | | | | | |
Interest income | |
| 153 | |
| 202 | |
| 242 | |
| 409 |
Interest expense | |
| (7,853) | |
| (3,588) | |
| (17,163) | |
| (7,618) |
Foreign currency (loss) gain | |
| (671) | |
| (384) | |
| 266 | |
| (523) |
Other | |
| 125 | |
| 122 | |
| 296 | |
| 232 |
Total other expense | |
| (8,246) | |
| (3,648) | |
| (16,359) | |
| (7,500) |
| | | | | | | | | | | | |
(Loss) income before income taxes | |
| (2,922) | |
| 21,886 | |
| (301,271) | |
| 32,970 |
Income tax expense | |
| 2,261 | |
| 6,395 | |
| 1,998 | |
| 9,436 |
Net (loss) income | | $ | (5,183) | | $ | 15,491 | | $ | (303,269) | | $ | 23,534 |
| | | | | | | | | | | | |
(Loss) earnings per share: | | | | | | | | | | | | |
Basic | | $ | (0.17) | | $ | 0.70 | | $ | (9.73) | | $ | 1.07 |
Diluted | | $ | (0.17) | | $ | 0.70 | | $ | (9.73) | | $ | 1.06 |
| | | | | | | | | | | | |
Shares used in (loss) earnings per share calculation: | | | | | | | | | | | | |
Basic | |
| 31,054 | |
| 22,006 | |
| 31,179 | |
| 21,997 |
Diluted | |
| 31,054 | |
| 22,208 | |
| 31,179 | |
| 22,203 |
The accompanying notes are an integral part of these consolidated financial statements.
4
US ECOLOGY, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(In thousands)
| | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, | ||||||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 | ||||
Net (loss) income | | $ | (5,183) | | $ | 15,491 | | $ | (303,269) | | $ | 23,534 |
Other comprehensive income (loss): | | | | | | | | | | | | |
Foreign currency translation gain (loss) | |
| 3,008 | |
| 1,680 | |
| (5,251) | |
| 3,369 |
Net changes in interest rate hedge, net of taxes of $(796), $(313), $(2,417) and ($497), respectively | | | (2,994) | | | (1,177) | | | (9,092) | | | (1,868) |
Comprehensive (loss) income, net of tax | | $ | (5,169) | | $ | 15,994 | | $ | (317,612) | | $ | 25,035 |
The accompanying notes are an integral part of these consolidated financial statements.
5
US ECOLOGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
| | | | | | |
| | Six Months Ended June 30, | ||||
|
| 2020 |
| 2019 | ||
Cash flows from operating activities: | | | | | | |
Net (loss) income | | $ | (303,269) | | $ | 23,534 |
Adjustments to reconcile net (loss) income to net cash provided by operating activities: | | | | | | |
Depreciation and amortization of property and equipment | |
| 36,396 | |
| 17,254 |
Amortization of intangible assets | |
| 18,634 | |
| 5,674 |
Accretion of closure and post-closure obligations | |
| 2,533 | |
| 2,258 |
Property and equipment impairment charges | | | — | | | 25 |
Goodwill impairment charges | | | 300,300 | | | — |
Unrealized foreign currency loss (gain) | |
| 1,020 | |
| (502) |
Deferred income taxes | |
| (2,093) | |
| 3,690 |
Share-based compensation expense | |
| 3,088 | |
| 2,467 |
Share-based payments of business development and integration expenses | |
| 973 | |
| — |
Unrecognized tax benefits | |
| 52 | | | 131 |
Net loss (gain) on disposition of assets | |
| 188 | |
| (142) |
Gain on insurance proceeds from damaged property and equipment | | | — | | | (9,153) |
Amortization and write-off of debt issuance costs | | | 679 | | | 409 |
Amortization and write-off of debt discount | | | 490 | | | — |
Change in fair value of contingent consideration | |
| (3,282) | |
| — |
Changes in assets and liabilities (net of effects of business acquisitions): | | | | | | |
Receivables | |
| 43,619 | |
| (5,346) |
Income taxes receivable | |
| 380 | |
| 452 |
Other assets | |
| (5,235) | |
| (1,384) |
Accounts payable and accrued liabilities | |
| (32,218) | |
| 404 |
Deferred revenue | |
| 2,702 | |
| 2,418 |
Accrued salaries and benefits | |
| (6,481) | |
| (2,025) |
Income taxes payable | |
| 1,848 | |
| (515) |
Closure and post-closure obligations | |
| (798) | |
| (775) |
Net cash provided by operating activities | |
| 59,526 | |
| 38,874 |
Cash flows from investing activities: | | | | | | |
Business acquisitions (net of cash acquired) | | | (3,309) | | | — |
Purchases of property and equipment | |
| (35,957) | |
| (24,657) |
Insurance proceeds from damaged property and equipment | | | — | | | 9,500 |
Proceeds from sale of property and equipment | |
| 788 | |
| 512 |
Purchases of restricted investments | |
| (902) | |
| (400) |
Proceeds from sale of restricted investments | |
| 752 | |
| 354 |
Net cash used in investing activities | |
| (38,628) | |
| (14,691) |
Cash flows from financing activities: | | | | | | |
Proceeds from long-term debt | | | 90,000 | | | — |
Payments on long-term debt | | | (2,250) | | | (30,000) |
Payments on short-term borrowings | | | (68,375) | | | (14,384) |
Proceeds from short-term borrowings | | | 72,353 | | | 14,384 |
Repurchase of common stock | |
| (18,332) | |
| — |
Dividends paid | |
| (5,667) | |
| (7,942) |
Payment of acquired contingent consideration liabilities | | | (2,085) | | | — |
Deferred financing costs paid | |
| (1,026) | |
| — |
Payment of equipment financing obligations | | | (3,046) | | | (408) |
Other | | | 27 | | | (914) |
Net cash provided by (used in) financing activities | |
| 61,599 | |
| (39,264) |
| | | | | | |
Effect of foreign exchange rate changes on cash | |
| (1,303) | |
| 836 |
| | | | | | |
Increase (decrease) in Cash and cash equivalents and restricted cash | |
| 81,194 | |
| (14,245) |
Cash and cash equivalents and restricted cash at beginning of period | |
| 42,140 | |
| 32,753 |
Cash and cash equivalents and restricted cash at end of period | | $ | 123,334 | | $ | 18,508 |
| | | | | | |
Reconciliation of Cash and cash equivalents and restricted cash | | | | | | |
Cash and cash equivalents at beginning of period | | | 41,281 | | | 31,969 |
Restricted cash at beginning of period | | | 859 | | | 784 |
Cash and cash equivalents and restricted cash at beginning of period | | $ | 42,140 | | $ | 32,753 |
Cash and cash equivalents at end of period | | | 122,521 | | | 17,690 |
Restricted cash at end of period | | | 813 | | | 818 |
Cash and cash equivalents and restricted cash at end of period | | $ | 123,334 | | $ | 18,508 |
Supplemental Disclosures: | | | | | | |
Income taxes paid, net of receipts | | $ | 1,612 | | $ | 5,694 |
Interest paid | | $ | 15,279 | | $ | 6,850 |
Non-cash investing and financing activities: | | | | | | |
Capital expenditures in accounts payable | | $ | 1,215 | | $ | 834 |
Restricted stock issued from treasury shares | | $ | 1,966 | | $ | 451 |
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 June 30, | | Six Months Ended June 30, | ||||||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 | ||||
Total stockholders' equity, beginning balances | | $ | 676,323 | | $ | 363,492 | | $ | 1,011,380 | | $ | 359,217 |
| | | | | | | | | | | | |
Common stock: | | | | | | | | | | | | |
Beginning balances | | $ | 315 | | $ | 221 | | $ | 315 | | $ | 220 |
Stock option exercises and issuance of common stock and restricted common stock | |
| — | | | — | |
| — | |
| 1 |
Ending balances | | $ | 315 | | $ | 221 | | $ | 315 | | $ | 221 |
| | | | | | | | | | | | |
Additional paid-in capital: | | | | | | | | | | | | |
Beginning balances | | $ | 817,730 | | $ | 183,953 | | $ | 816,345 | | $ | 183,834 |
Share-based compensation | |
| 1,524 | | | 1,245 | |
| 3,088 | |
| 2,467 |
Share-based payments of business development and integration expenses | | | 792 | | | — | | | 973 | | | — |
Stock option exercises and issuance of common stock and restricted common stock | | | (77) | | | — | | | (437) | | | (1,103) |
Issuance of restricted common stock from treasury shares | | | (2,412) | | | (451) | | | (2,412) | | | (451) |
Ending balances | | $ | 817,557 | | $ | 184,747 | | $ | 817,557 | | $ | 184,747 |
| | | | | | | | | | | | |
Retained earnings (deficit): | | | | | | | | | | | | |
Beginning balances | | $ | (97,179) | | $ | 193,397 | | $ | 206,574 | | $ | 189,324 |
Net (loss) income | |
| (5,183) | | | 15,491 | |
| (303,269) | |
| 23,534 |
Dividends paid | | | — | | | (3,972) | | | (5,667) | | | (7,942) |
Ending balances | | $ | (102,362) | | $ | 204,916 | | $ | (102,362) | | $ | 204,916 |
| | | | | | | | | | | | |
Treasury stock: | | | | | | | | | | | | |
Beginning balances | | $ | (18,332) | | $ | (1,286) | | $ | — | | $ | (370) |
Repurchase of common stock | |
| — | | | — | |
| (18,332) | |
| (916) |
Issuance of restricted common stock from treasury shares | | | 1,966 | | | 451 | | | 1,966 | | | 451 |
Ending balances | | $ | (16,366) | | $ | (835) | | $ | (16,366) | | $ | (835) |
| | | | | | | | | | | | |
Accumulated other comprehensive income (loss): | | | | | | | | | | | | |
Beginning balances | | $ | (26,211) | | $ | (12,793) | | $ | (11,854) | | $ | (13,791) |
Other comprehensive income (loss) | |
| 14 | | | 503 | |
| (14,343) | |
| 1,501 |
Ending balances | | $ | (26,197) | | $ | (12,290) | | $ | (26,197) | | $ | (12,290) |
| | | | | | | | | | | | |
Total stockholders' equity, ending balances | | $ | 672,947 | | $ | 376,759 | | $ | 672,947 | | $ | 376,759 |
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, 2019. The results of operations for the three and six months ended June 30, 2020 are not necessarily indicative of the results to be expected for the entire year ending December 31, 2020.
The Company’s consolidated balance sheet as of December 31, 2019 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 December 2019, the FASB issued ASU No. 2019-12, “Income Taxes” (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”), which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. The Company is currently evaluating the impact of this standard on its consolidated financial statements and related disclosures.
In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses” (Topic 326), which became effective for reporting periods beginning after December 15, 2019. The standard replaced the incurred loss impairment methodology under current GAAP with a methodology that reflects expected credit losses and requires the use of a forward-looking expected credit loss model for accounts receivables, loans, and other financial instruments. The standard requires a modified retrospective approach through a cumulative-effect adjustment to retained earnings as of the beginning
8
of the first reporting period in which the guidance is effective. The Company adopted the new credit loss standard effective January 1, 2020 and the impact of the adoption was not material to the Company's consolidated financial statements as credit losses are not expected to be significant based on historical collection trends, the financial condition of payment partners, and external market factors. The Company will continue to actively monitor the impact of the recent coronavirus (“COVID-19”) pandemic on expected credit losses.
NOTE 2. REVENUES
Our operations are managed in 2 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.
The following table presents our revenue disaggregated by our reportable segments and service lines:
| | | | | | | | | |
| | Three Months Ended June 30, 2020 | |||||||
| | | | Field & | | | | ||
| | Environmental | | Industrial | | | | ||
$s in thousands |
| Services |
| Services |
| Total | |||
Treatment & Disposal Revenue (1) | | $ | 90,955 | | $ | 9,965 | | $ | 100,920 |
Services Revenue: | | | | | | | | | |
Transportation and Logistics (2) | | | 19,454 | | | 6,907 | | | 26,361 |
Industrial Services (3) | | | — | | | 28,566 | | | 28,566 |
Small Quantity Generation (4) | | | — | | | 11,159 | | | 11,159 |
Total Waste Management (5) | | | — | | | 6,848 | | | 6,848 |
Remediation (6) | | | — | | | 3,117 | | | 3,117 |
Emergency Response (7) | | | — | | | 23,168 | | | 23,168 |
Domestic Standby Services (8) | | | — | | | 8,102 | | | 8,102 |
Other (9) | | | — | | | 5,677 | | | 5,677 |
Revenue | | $ | 110,409 | | $ | 103,509 | | $ | 213,918 |
| | | | | | | | | |
| | Three Months Ended June 30, 2019 | |||||||
| | | | Field & | | | | ||
| | Environmental | | Industrial | | | | ||
$s in thousands |
| Services |
| Services |
| Total | |||
Treatment & Disposal Revenue (1) | | $ | 90,379 | | $ | 3,133 | | $ | 93,512 |
Services Revenue: | | | | | | | | | |
Transportation and Logistics (2) | | | 22,465 | | | 12,760 | | | 35,225 |
Industrial Services (3) | | | — | | | 4,963 | | | 4,963 |
Small Quantity Generation (4) | | | — | | | 9,326 | | | 9,326 |
Total Waste Management (5) | | | — | | | 8,004 | | | 8,004 |
Remediation (6) | | | — | | | 889 | | | 889 |
Emergency Response (7) | | | — | | | 3,180 | | | 3,180 |
Other (9) | | | — | | | 703 | | | 703 |
Revenue | | $ | 112,844 | | $ | 42,958 | | $ | 155,802 |
9
| | | | | | | | | |
| | Six Months Ended June 30, 2020 | |||||||
| | | | Field & | | | | ||
| | Environmental | | Industrial | | | | ||
$s in thousands |
| Services |
| Services |
| Total | |||
Treatment & Disposal Revenue (1) | | $ | 191,005 | | $ | 19,884 | | $ | 210,889 |
Services Revenue: | | | | | | | | | |
Transportation and Logistics (2) | | | 46,149 | | | 13,245 | | | 59,394 |
Industrial Services (3) | | | — | | | 57,064 | | | 57,064 |
Small Quantity Generation (4) | | | — | | | 22,236 | | | 22,236 |
Total Waste Management (5) | | | — | | | 15,317 | | | 15,317 |
Remediation (6) | | | — | | | 13,349 | | | 13,349 |
Emergency Response (7) | | | — | | | 48,188 | | | 48,188 |
Domestic Standby Services (8) | | | — | | | 17,569 | | | 17,569 |
Other (9) | | | — | | | 10,632 | | | 10,632 |
Revenue | | $ | 237,154 | | $ | 217,484 | | $ | 454,638 |
| | | | | | | | | |
| | Six Months Ended June 30, 2019 | |||||||
| | | | Field & | | | | ||
| | Environmental | | Industrial | | | | ||
$s in thousands |
| Services |
| Services |
| Total | |||
Treatment & Disposal Revenue (1) | | $ | 168,092 | | $ | 5,929 | | $ | 174,021 |
Services Revenue: | | | | | | | | | |
Transportation and Logistics (2) | | | 37,085 | | | 19,852 | | | 56,937 |
Industrial Services (3) | | | — | | | 10,980 | | | 10,980 |
Small Quantity Generation (4) | | | — | | | 17,515 | | | 17,515 |
Total Waste Management (5) | | | — | | | 16,719 | | | 16,719 |
Remediation (6) | | | — | | | 2,616 | | | 2,616 |
Emergency Response (7) | | | — | | | 6,226 | | | 6,226 |
Other (9) | | | — | | | 1,825 | | | 1,825 |
Revenue | | $ | 205,177 | | $ | 81,662 | | $ | 286,839 |
(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 June 30, 2020 and 2019, 27% and 23%, respectively, of our treatment and disposal revenue was derived from Event Business projects. Base Business revenue accounted for 73% and 77% of our treatment and disposal revenue for the three months ended June 30, 2020 and 2019, respectively. For the six months ended June 30, 2020 and 2019, 26% and 19%, respectively, of our treatment and disposal revenue was derived from Event Business projects. Base Business revenue accounted for 74% and 81% of our treatment and disposal revenue for the six months ended June 30, 2020 and 2019, 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 total waste management (“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. |
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(8) | We provide government-mandated, commercial standby oil spill compliance solutions to companies that store, transport, produce or handle petroleum and certain nonpetroleum oils on or near U.S. waters. Our standby services customers pay annual retainer fees under long-term or evergreen contracts for access to our regulatory certifications, specialized assets and highly trained personnel. When a customer with a retainer contract experiences a spill incident, we coordinate and manage the spill response, which results in incremental revenue for the services provided, in addition to the retainer fees. |
(9) | Includes equipment rental and other miscellaneous services. |
We provide services primarily in the United States, Canada and the Europe, Middle East, and Africa (“EMEA”) region. The following table presents our revenue disaggregated by our reportable segments and geographic location where the underlying services were performed:
| | | | | | | | | | | | | | | | | | |
|
| Three Months Ended June 30, 2020 | | Three Months Ended June 30, 2019 | ||||||||||||||
| | | | Field & | | | | | | | Field & | | | | ||||
| | Environmental | | Industrial | | | | | Environmental | | Industrial | | | | ||||
$s in thousands |
| Services |
| Services |
| Total |
| Services |
| Services |
| Total | ||||||
United States | | $ | 93,709 | | $ | 97,656 | | $ | 191,365 | | $ | 85,785 | | $ | 42,958 | | $ | 128,743 |
Canada | | | 16,700 | | | 498 | | | 17,198 | | | 27,059 | | | — | | | 27,059 |
EMEA | | | — | | | 3,915 | | | 3,915 | | | — | | | — | | | — |
Other (1) | |
| — | |
| 1,440 | |
| 1,440 | |
| — | |
| — | |
| — |
Total revenue | | $ | 110,409 | | $ | 103,509 | | $ | 213,918 | | $ | 112,844 | | $ | 42,958 | | $ | 155,802 |
| | | | | | | | | | | | | | | | | | |
|
| Six Months Ended June 30, 2020 | | Six Months Ended June 30, 2019 | ||||||||||||||
| | | | Field & | | | | | | | Field & | | | | ||||
| | Environmental | | Industrial | | | | | Environmental | | Industrial | | | | ||||
$s in thousands |
| Services |
| Services |
| Total |
| Services |
| Services |
| Total | ||||||
United States | | $ | 201,637 | | $ | 203,202 | | $ | 404,839 | | $ | 163,144 | | $ | 81,662 | | $ | 244,806 |
Canada | |
| 35,517 | |
| 1,575 | |
| 37,092 | |
| 42,033 | |
| — | |
| 42,033 |
EMEA | | | — | | | 9,154 | | | 9,154 | | | — | | | — | | | — |
Other (1) | | | — | | | 3,553 | | | 3,553 | | | — | | | — | | | — |
Total revenue | | $ | 237,154 | | $ | 217,484 | | $ | 454,638 | | $ | 205,177 | | $ | 81,662 | | $ | 286,839 |
(1) | Includes Mexico, Asia Pacific, and Latin America and Caribbean geographical regions. |
Deferred Revenue
We record deferred revenue when cash payments are received, or advance billings are charged, prior to performance of services, such as waste that has been received but not yet treated or disposed. Revenue is recognized when these services are performed. During the three months ended June 30, 2020 and 2019, we recognized $4.5 million and $1.5 million of revenue that was included in the deferred revenue balance at the beginning of each year, respectively. During the six months ended June 30, 2020 and 2019, we recognized $12.9 million and $9.0 million of revenue that was included in the deferred revenue balance at the beginning of each year, respectively.
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.
11
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. Other commissions and incremental costs to obtain a contract are not material.
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
Acquisition of Impact Environmental Services, Inc.
On January 28, 2020, we acquired Impact Environmental Services, Inc., an industrial cleaning and environmental services company based in Romulus, Michigan for $3.3 million. The acquired operations are reported as part of our Field & Industrial Services segment, however, revenues, net income, earnings per share and total assets are not material to our consolidated financial position or results of operations.
We allocated the purchase price to the assets acquired and liabilities assumed based on estimates of the fair value at the date of the acquisition, resulting in $300,000 allocated to goodwill and $900,000 allocated to amortizing intangible assets (primarily customer relationships) to be amortized over a weighted average life of approximately 12 years. All of the goodwill recognized was assigned to our Field & Industrial Services segment and is expected to be deductible for income tax purposes over a 15-year amortization period.
NRC Group Holdings Corp.
On November 1, 2019, the Company completed its acquisition (the “NRC Merger”) of NRC Group Holdings Corp. (“NRC”), a provider of comprehensive environmental, compliance and waste management services to the marine and rail transportation, general industrial and energy industries. The addition of NRC’s substantial service network strengthened and expanded US Ecology’s suite of environmental services, including new energy waste disposal and service capabilities, and provided expanded opportunities to establish US Ecology as a leader in standby and emergency response services.
The total merger consideration was $1,024.8 million, comprised of the following:
| | | |
| | November 1, | |
$s in thousands |
| 2019 | |
Fair value of US Ecology common stock issued (1) | | $ | 581,101 |
Fair value of replacement warrants issued (2) | |
| 44,858 |
Fair value of replacement restricted stock units issued (3) | |
| 141 |
Fair value of replacement stock options (4) | |
| 360 |
Repayment of NRC’s term loan and revolving credit facility | |
| 398,373 |
Total merger consideration | | $ | 1,024,833 |
(1) | The fair value of US Ecology common stock issued was calculated based on 9,337,949 shares of US Ecology common stock multiplied by the closing price of US Ecology common stock of $62.23 per share on October 31, 2019, the day |
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immediately preceding the closing of the NRC Merger. |
(2) | The fair value of replacement warrants issued was calculated based on 3,772,753 replacement warrants multiplied by the fair value per warrant of $11.89. The fair value per warrant was based on the closing price of the replaced NRC warrants (NYSE: NRCG.WS) of $2.33 on October 31, 2019, the day immediately preceding the closing of the NRC Merger, divided by the exchange ratio of 0.196 pursuant to that certain Agreement and Plan of Merger, dated as of June 23, 2019, by and among the Company, US Ecology Holdings, Inc. (formerly known as US Ecology, Inc.), ECOL Merger Sub, Inc., NRC and Rooster Merger Sub, Inc. (the “Merger Agreement”). |
(3) | The fair value of replacement restricted stock units issued was calculated based on 118,239 replacement restricted stock units multiplied by the closing price of US Ecology common stock of $62.23 per share on October 31, 2019, the day immediately preceding the closing of the NRC Merger, further multiplied by the ratio of the precombination service period to the remaining vesting period, or approximately 1.9%. |
(4) | The fair value of replacement stock options issued was calculated based on 29,400 replacement stock options multiplied by the fair value per option of $12.26. The fair value per option was calculated using the Black-Scholes option pricing model, with the following weighted-average assumptions: strike price of $52.30 per option, dividend yield of 1.2%; expected volatility of 28.9%; average risk-free interest rate of 1.5%; and an expected term of 1 year. The replacement stock options became fully vested at the merger date therefore the entire fair value is considered merger consideration. |
The payment of transaction fees and expenses and repayment of $398.4 million of NRC’s debt were funded using proceeds from a new $450.0 million seven-year term loan. See Note 11 for more information.
We have recognized the assets and liabilities of NRC based on our preliminary estimates of their acquisition date fair values. The purchase price allocations are preliminary and subject to change. We continue to gather information relevant to our determination of the fair value of acquired assets and liabilities primarily related to, but not limited to, property and equipment, identifiable intangible assets and deferred income taxes. Any adjustments to the purchase price allocations are made as soon as practicable but no later than one year from the merger date. The following table summarizes the merger consideration and the preliminary fair value estimates of assets acquired and liabilities assumed, recognized at the merger date, with purchase price allocation adjustments since the preliminary purchase price allocation as previously disclosed as of December 31, 2019:
| | | | | | | | | |
| | December 31, | | | | June 30, | |||
$s in thousands |
| 2019 |
| Adjustments |
| 2020 | |||
Current assets | | $ | 131,653 | | $ | — | | $ | 131,653 |
Property and equipment | | | 197,045 | | | — | | | 197,045 |
Identifiable intangible assets | | | 303,600 | | | — | | | 303,600 |
Other assets | | | 41,687 | | | — | | | 41,687 |
Current liabilities | | | (83,460) | | | (4,036) | | | (87,496) |
Deferred income tax liabilities | | | (56,596) | | | 671 | | | (55,925) |
Other liabilities | | | (57,581) | | | — | | | (57,581) |
Total identifiable net assets | | | 476,348 | | | (3,365) | | | 472,983 |
Goodwill | | | 548,485 | | | 3,365 | | | 551,850 |
Total purchase price | | $ | 1,024,833 | | $ | — | | $ | 1,024,833 |
Purchase price allocation adjustments related primarily to the receipt of additional information regarding the fair values of accrued liabilities, deferred income taxes and residual goodwill.
Goodwill of $551.9 million arising from the acquisition is primarily attributable to the assembled workforce of NRC and expected synergies from combining operations. $310.8 million of the goodwill recognized was allocated to our Environmental Services segment and $241.1 million of the goodwill recognized was allocated to Field & Industrial Services segment. We expect $33.3 million of the acquired goodwill to be deductible for income tax purposes.
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During the first quarter of 2020, management determined that the projected future cash flows of certain reporting units identified as part of the NRC Merger indicated that the fair value of the reporting units may be below their respective carrying amounts. Accordingly, we performed an interim assessment of each reporting unit’s goodwill as of March 31, 2020. Based on the results of this assessment, we recognized goodwill impairment charges of $283.6 million related to our Environmental Services segment and $16.7 million related to our Field & Industrial Services segment in the first quarter of 2020. Refer to Note 10 for additional information.
The preliminary fair value of identifiable intangible assets related to the acquisition of NRC by major intangible asset class and corresponding weighted average amortization period are as follows:
| | | | | |
| | | | | Average |
| | | | | Amortization |
$s in thousands |
| Fair Value |
| Period (Years) | |
Amortizing intangible assets: | | | | | |
Customer relationships - noncontractual | | $ | 193,700 | | 14 |
Customer relationships - contractual | | | 34,400 | | 7 |
Permits and licenses | | | 8,700 | | 16 |
Tradenames | | | 6,100 | | 2 |
Non-compete agreements | | | 3,300 | | 2 |
Total identified amortizing intangible assets | | | 246,200 | | |
Non-amortizing intangible assets: | | | | | |
Permits and licenses | | | 57,400 | | n/a |
Total identified intangible assets | | $ | 303,600 | | |
The following unaudited pro forma financial information presents the combined results of operations as if NRC had been combined with US Ecology as of January 1, 2019. The pro forma financial information includes the accounting effects of the business combination, including the amortization of intangible assets, depreciation of property, plant and equipment, and interest expense. The unaudited pro forma financial information is presented for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisition had taken place at the beginning of the periods presented, nor should it be taken as indication of our future consolidated results of operations.
| | | | | | |
| | (unaudited) | ||||
| | Three Months Ended | | Six Months Ended | ||
$s in thousands |
| June 30, 2019 |
| June 30, 2019 | ||
Pro forma combined: | | | | | | |
Revenue | | | 276,862 | | | 508,057 |
Net income | | | 6,163 | | | 3,306 |
The amounts of revenue and operating loss from NRC included in the Company’s consolidated statements of operations for the three months ended June 30, 2020 were $70.4 million and $12.3 million, respectively. The amounts of revenue and operating loss from NRC included in the Company’s consolidated statements of operations for the six months ended June 30, 2020 were $157.0 million and $316.3 million, respectively. NRC Merger-related business development and integration expenses of $2.9 million and $5.8 million are included in Selling, general and administrative expenses in the Company’s consolidated statements of operations for the three and six months ended June 30, 2020, respectively.
W.I.S.E. Environmental Solutions Inc.
On August 1, 2019, we acquired 100% of the outstanding shares of W.I.S.E. Environmental Solutions 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 U.S. dollars at the time of transaction and was funded with borrowings under the Credit Agreement. 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. As such, pro forma financial information has not been provided.
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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 $7.7 million allocated to goodwill and $6.2 million allocated to intangible assets (primarily customer relationships) to be amortized over a weighted average life of approximately 14 years. The purchase price allocation is preliminary, as estimates and assumptions are subject to change as more information becomes available.
Goodwill of $7.7 million arising from the acquisition is attributable to the assembled workforce and the future economic benefits of synergies with our other regional facilities and expansion into new markets. All of the goodwill recognized was assigned to our Field & Industrial Services segment and is not expected to be deductible for income tax purposes.
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, 2019 | | $ | (10,925) | | $ | (929) | | $ | (11,854) |
Other comprehensive loss before reclassifications, net of tax | |
| (5,251) | |
| (9,892) | |
| (15,143) |
Amounts reclassified out of AOCI, net of tax (1) | |
| — | |
| 800 | |
| 800 |
Other comprehensive loss, net | |
| (5,251) | |
| (9,092) | |
| (14,343) |
Balance at June 30, 2020 | | $ | (16,176) | | $ | (10,021) | | $ | (26,197) |
(1) | Before-tax reclassifications of $744,000 ($588,000 after-tax) and $1.0 million ($800,000 after-tax) for the three and six months ended June 30, 2020, 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 or, for terminated swap agreements, amortized to interest expense over the period from termination to original maturity. Amounts in AOCI expected to be reclassified to interest expense over the next 12 months total approximately $4.4 million ($3.5 million after-tax). |
| | | | | | | | | |
| | 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 | |
| 3,369 | |
| (1,658) | |
| 1,711 |
Amounts reclassified out of AOCI, net of tax (2) | |
| — | |
| (210) | |
| (210) |
Other comprehensive income (loss), net | |
| 3,369 | |
| (1,868) | |
| 1,501 |
Balance at June 30, 2019 | | $ | (11,328) | | $ | (962) | | $ | (12,290) |
(2) | Before-tax reclassifications of $127,000 ($100,000 after-tax) and $266,000 ($210,000 after-tax) for the three and six months ended June 30, 2019, 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. |
NOTE 5. CONCENTRATIONS AND CREDIT RISK
Major Customers
No customer accounted for more than 10% of total revenue for the three or six months ended June 30, 2020 or 2019, respectively. No customer accounted for more than 10% of total trade receivables as of June 30, 2020 or December 31, 2019.
15
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. Credit risk associated with a portion of the Company’s trade receivables is reduced by our ability to submit claims to the Oil Spill Liability Trust Fund (“OSLTF”) for reimbursement of unpaid customer receivables related to services regulated under the provisions of the Oil Pollution Act of 1990 (“OPA 90”). As of June 30, 2020, the Company did not have any trade receivables that are eligible for submission to the OSLTF for reimbursement.
NOTE 6. RECEIVABLES
Receivables consisted of the following:
| | | | | | |
|
| June 30, | | December 31, | ||
$s in thousands | | 2020 |
| 2019 | ||
Trade | | $ | 163,986 | | $ | 196,593 |
Unbilled revenue | |
| 42,896 | |
| 54,727 |
Other | |
| 7,317 | |
| 7,000 |
Total receivables | |
| 214,199 | |
| 258,320 |
Allowance for credit losses | |
| (3,018) | |
| (3,010) |
Receivables, net | | $ | 211,181 | | $ | 255,310 |
NOTE 7. FAIR VALUE MEASUREMENTS
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Assets and liabilities recorded at fair value are categorized using defined hierarchical levels directly related to the amount of subjectivity associated with the inputs to fair value measurements, as follows:
● | Level 1 - Quoted prices in active markets for identical assets or liabilities; |
● | Level 2 - Inputs other than quoted prices included within Level 1 that are either directly or indirectly observable; |
● | Level 3 - Unobservable inputs in which little or no market activity exists, requiring an entity to develop its own assumptions that market participants would use to value the asset or liability. |
The Company’s financial instruments consist of cash and cash equivalents, accounts receivable, restricted cash and investments, accounts payable and accrued liabilities, debt, interest rate swap agreements and contingent consideration. 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 June 30, 2020, 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 June 30, 2020, the fair value of the Company’s variable rate term loan was
16
estimated to be $437.7 million, and the carrying value of the Company’s variable-rate revolving credit facility approximates fair value due to the short-term nature of the interest rates.
The Company estimates the fair value of its contingent consideration liabilities using Level 3 inputs, including both observable and unobservable inputs. As a result, unrealized gains and losses may include changes in fair value that are attributable to both observable (e.g., changes in market interest rates) and unobservable (e.g., changes in unobservable long-dated volatilities) inputs.
The Company’s assets and liabilities measured at fair value on a recurring basis consisted of the following:
| | | | | | | | | | | | |
| | June 30, 2020 | ||||||||||
| | Quoted Prices in | | Other Observable | | Unobservable | | | | |||
| | Active Markets | | Inputs | | Inputs | | | | |||
$s in thousands |
| (Level 1) |
| (Level 2) |
| (Level 3) |
| Total | ||||
Assets: | | | | | | | | | | | | |
Fixed-income securities (1) | | $ | 2,418 | | $ | 1,941 | | $ | — | | $ | 4,359 |
Money market funds (2) | | | 60,342 | | | — | | | — | | | 60,342 |
Total | | $ | 62,760 | | $ | 1,941 | | $ | — | | $ | 64,701 |
| | | | | | | | | | | | |
Liabilities: | | | | | | | | | | | | |
Interest rate swap agreement (3) | | $ | — | | $ | 13,188 | | $ | — | | $ | 13,188 |
Contingent consideration (4) | | | — | | | — | | | 2,657 | | | 2,657 |
Total | | $ | — | | $ | 13,188 | | $ | 2,657 | | $ | 15,845 |
| | | | | | | | | | | | |
| | December 31, 2019 | ||||||||||
| | Quoted Prices in | | Other Observable | | Unobservable | | | | |||
| | Active Markets | | Inputs | | Inputs | | | | |||
$s in thousands |
| (Level 1) |
| (Level 2) |
| (Level 3) |
| Total | ||||
Assets: | | | | | | | | | | | | |
Fixed-income securities (1) | | $ | 2,380 | | $ | 1,830 | | $ | — | | $ | 4,210 |
Money market funds (2) | | | 859 | | | — | | | — | | | 859 |
Total | | $ | 3,239 | | $ | 1,830 | | $ | — | | $ | 5,069 |
| | | | | | | | | | | | |
Liabilities: | | | | | | | | | | | | |
Interest rate swap agreement (3) | | $ | — | | $ | 1,176 | | $ | — | | $ | 1,176 |
Contingent consideration (4) | | | — | | | — | | | 8,283 | | | 8,283 |
Total | | $ | — | | $ | 1,176 | | $ | 8,283 | | $ | 9,459 |
(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 portions of our Cash and cash equivalents and 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. The portion of Restricted cash and investments that is invested in money market funds is 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 March 2020 that effectively converts a portion of our variable-rate debt to a fixed interest rate. The swap is designated as a highly-effective cash flow hedge, with gains and losses deferred in other comprehensive income to be recognized as an adjustment to interest expense in the same period that the hedged interest payments affect earnings. The interest rate swap has an effective date of March 31, 2020 in an initial notional amount of $500.0 million. The fair value of the interest rate swap agreement represents the difference in the present value of cash flows calculated (i) at the contracted |
17
interest rates and (ii) at current market interest rates at the end of the period. We calculate the fair value of interest rate swap agreements quarterly based on the quoted market price for the same or similar financial instruments. The fair value of the interest rate swap agreement is included in Other long-term liabilities in the Company’s consolidated balance sheet. |
(4) | Our contingent consideration liabilities represent the estimated fair value of potential future payments the Company may be required to remit under the terms of historical purchase agreements entered into by NRC prior to the NRC Merger. The payments are contingent on the acquired businesses’ achievement of annual earnings targets in certain years and other events considered in the purchase agreements. The fair value of our contingent consideration liabilities are calculated using either a Monte Carlo simulation or modified Black-Scholes analyses based on earnings projections for the respective earn-out periods, corresponding earnings thresholds, and approximate timing of payments as outlined in the purchase agreements. The analyses utilize the following assumptions: (i) expected term; (ii) risk-adjusted net sales or earnings; (iii) risk-free interest rate; and (iv) expected volatility of earnings. Estimated payments, as determined through the respective models, are discounted by a credit spread assumption to account for credit risk. At June 30, 2020, the fair value of our contingent consideration liability of $2.7 million was included in Accrued liabilities. At December 31, 2019, the fair value of our contingent consideration liabilities of $6.6 million and $1.7 million were included in Accrued liabilities and Other long-term liabilities, respectively. We revalue our contingent consideration payments each period and any increases or decreases to fair value are included in Selling, general and administrative expenses in our consolidated statements of operations. Fair values may be impacted by certain unobservable inputs, most significantly with regard to discount rates, expected volatility and historical and projected performance. Significant changes to these inputs in isolation could result in a significantly different fair value measurement. |
| | | | | | |
| | Three Months Ended | | Six Months Ended | ||
$s in thousands |
| June 30, 2020 |
| June 30, 2020 | ||
Contingent consideration, beginning of period | | $ | 6,911 | | $ | 8,283 |
Change in fair value of contingent consideration | | | (2,155) | | | (3,282) |
Contingent consideration paid | | | (2,085) | | | (2,085) |
Foreign currency translation | |
| (14) | |
| (259) |
Contingent consideration, end of period | | $ | 2,657 | | $ | 2,657 |
NOTE 8. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
| | | | | | |
|
| June 30, | | December 31, | ||
$s in thousands | | 2020 |
| 2019 | ||
Cell development costs | | $ | 178,170 | | $ | 174,561 |
Land and improvements | |
| 53,246 | |
| 52,909 |
Buildings and improvements | |
| 113,182 | |
| 109,580 |
Railcars | |
| 17,299 | |
| 17,299 |
Vehicles, vessels and other equipment | |
| 337,783 | |
| 317,472 |
Construction in progress | |
| 69,261 | |
| 61,537 |
Total property and equipment | |
| 768,941 | |
| 733,358 |
Accumulated depreciation and amortization | |
| (285,363) | |
| (254,590) |
Property and equipment, net | | $ | 483,578 | | $ | 478,768 |
Depreciation and amortization expense for the three months ended June 30, 2020 and 2019 was $18.4 million and $9.1 million, respectively. Depreciation and amortization expense for the six months ended June 30, 2020 and 2019 was $36.4 million and $17.3 million, respectively.
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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 non-lease components in our leases. 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.
Lease assets and liabilities consisted of the following:
| | | | | | |
$s in thousands |
| June 30, 2020 |
| December 31, 2019 | ||
Assets: | | | | | | |
Operating right-of-use assets (1) | | $ | 52,202 | | $ | 57,396 |
Finance right-of-use assets (2) | | | 22,721 | | | 20,499 |
Total | | $ | 74,923 | | $ | 77,895 |
| | | | | | |
Liabilities: | | | | | | |
Current: | | | | | | |
Operating (3) | | $ | 17,312 | | $ | 17,317 |
Finance (4) | | | 4,478 | | | 4,128 |
Long-term: | | | | | | |
Operating (5) | | | 35,121 | | | 39,954 |
Finance (6) | | | 18,692 | | | 16,308 |
Total | | $ | 75,603 | | $ | 77,707 |
(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 $5.3 million and $2.7 million as of June 30, 2020 and December 31, 2019, respectively. |
(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:
| | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, | ||||||||
$s in thousands |
| 2020 |
| 2019 |
| 2020 |
| 2019 | ||||
Operating lease cost (1) | | $ | 4,940 | | $ | 1,713 | | $ | 9,939 | | $ | 3,455 |
Finance lease cost: | | | | | | | | | | | | |
Amortization of leased assets (2) | | | 1,350 | | | 248 | | | 2,644 | | | 476 |
Interest on lease liabilities (3) | | | 315 | | | 30 | | | 633 | | | 50 |
Total | | $ | 6,605 | | $ | 1,991 | | $ | 13,216 | | $ | 3,981 |
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(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:
| | | | | | |
| | Six Months Ended June 30, | ||||
$s in thousands |
| 2020 |
| 2019 | ||
Cash paid for amounts included in the measurement of lease liabilities: | | | | | | |
Operating cash flows from operating leases | | $ | 9,653 | | $ | 3,238 |
Operating cash flows from finance leases | | $ | 633 | | $ | 50 |
Financing cash flows from finance leases | | $ | 2,294 | | $ | 408 |
| | | | | | |
Non-cash investing and financing activities: | | | | | | |
Right-of-use assets obtained in exchange for new operating lease liabilities | | $ | 3,851 | | $ | 2,397 |
Right-of-use assets obtained in exchange for new finance lease liabilities | | $ | 5,039 | | $ | 1,844 |
NOTE 10. GOODWILL AND INTANGIBLE ASSETS
Changes in goodwill for the six months ended June 30, 2020 consisted of the following:
| | | | | | | | | | | | | | | |
| | | | | | | | Field & | | | | ||||
| | Environmental | | Industrial | | | | ||||||||
|
| Services | | Services | | | | ||||||||
| | | | Accumulated | | | | Accumulated | | | | ||||
$s in thousands |
| Gross |
| Impairment |
| Gross |
| Impairment |
| Total | |||||
Balance at December 31, 2019 | | $ | 475,271 | | $ | (6,870) | | $ | 298,579 | | $ | — | | $ | 766,980 |
Impairment charges | | | — | | | (283,600) | | | — | | | (16,700) | | | (300,300) |
NRC Merger purchase price allocation adjustment | | | 1,895 | | | — | | | 1,470 | | | — | | | 3,365 |
Impact Environmental acquisition | | | — | | | — | | | 300 | | | — | | | 300 |
Foreign currency translation | |
| (741) | | | — | |
| (326) | | | — | |
| (1,067) |
Balance at June 30, 2020 | | $ | 476,425 | | $ | (290,470) | | $ | 300,023 | | $ | (16,700) | | $ | 469,278 |
We assess goodwill for impairment during the fourth quarter as of October 1 of each year, and also if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount.
In connection with our financial review and forecasting procedures performed during the first quarter of 2020, management determined that the projected future cash flows of our Energy Waste Disposal Services (“EWDS”) reporting unit and our International reporting unit (described below) indicated that the fair value of such reporting units may be below their respective carrying amounts. Accordingly, we performed an interim assessment of each reporting unit’s fair value as of March 31, 2020 (the “Interim Assessment”). Based on the results of the Interim Assessment, we recognized goodwill impairment charges of $283.6 million related to our EWDS reporting unit and $16.7 million related to our International reporting unit in the first quarter of 2020. As of June 30, 2020, after the recording these impairment charges, remaining goodwill balances for the EWDS and International reporting units were $27.2 million and $1.7 million, respectively.
Our EWDS reporting unit, a component of our Environmental Services segment, provides energy-related services including solid and liquid waste treatment and disposal, equipment cleaning and maintenance, specialty equipment rental,
spill containment and site remediation for a full complement of oil and gas waste streams, predominately to upstream energy customers currently concentrated in the Eagle Ford and Permian Basins in Texas. Our International reporting unit, a component of our Field & Industrial Services segment, provides industrial and emergency response services to the offshore oil and gas sector in the North Sea and land-based industries across the EMEA region. Both our EWDS and
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International reporting units are dependent on energy-related exploration and production investments and expenditures by our energy industry customers. Lower crude oil prices and the volatility of such prices affect the level of investment as it impacts the ability of energy companies to access capital on economically advantageous terms or at all. In addition, energy companies decrease investments when the projected profits are inadequate or uncertain due to lower crude oil prices or volatility in crude oil prices. Such reductions in capital spending negatively impact energy waste generation and therefore the demand for our services. Recent volatility and historically low oil prices have adversely impacted customers of our EWDS reporting unit and our International reporting unit, negatively affecting demand for our services.
The principal factors contributing to the goodwill impairment charges for both the EWDS and International reporting units related to historically-low energy commodity prices reducing anticipated energy-related exploration and production investments and expenditures by our energy industry customers, which negatively impacted each reporting unit’s prospective cash flows and each reporting unit's estimated fair value. A longer-than-expected recovery in crude oil pricing and energy-related exploration and production investments became evident during the first quarter of 2020 as we assessed the projected impact of the COVID-19 pandemic and foreign oil production increases on the global demand for oil and updated the long-term projections for each reporting unit which, as a result, decreased each reporting unit’s anticipated future cash flows as compared to those estimated previously.
The EWDS and International reporting units were acquired as part of the NRC Merger on November 1, 2019. As part of the preliminary purchase price allocation, the assets and liabilities of NRC were recorded at their preliminary fair value with the purchase price in excess of net fair value recorded as goodwill. Goodwill was allocated to the reporting units based on the relative preliminary fair value of each reporting unit to the total fair value of NRC.
Consistent with our annual impairment testing methodology, we utilized a weighted average of (1) an income approach and (2) a market approach to determine the fair value of each of the reporting units for the Interim Assessment. The income approach is based on the estimated present value of future cash flows for each reporting unit. The market approach is based on assumptions about how market data relates to each reporting unit.
Assessing impairment inherently involves management judgments as to the assumptions used to calculate fair value of the reporting units and the impact of market conditions on those assumptions. The key inputs that management uses in its assumptions to estimate the fair value of our reporting units under the income-based approach are as follows:
● | Projected cash flows of the reporting unit, with consideration given to projected revenues, operating margins and the levels of capital investment required to generate the corresponding revenues; and |
● | Weighted average cost of capital (“WACC”), the risk-adjusted rate used to discount the projected cash flows. |
To develop the projected cash flows of our reporting units, management considers factors that may impact the revenue streams within each reporting unit. These factors include, but are not limited to, economic conditions on both a global scale and specifically in the regions in which the reporting units operate, customer relationships, strategic plans and opportunities, required returns on invested capital and competition from other service providers. With regard to operating margins, management considers its historical reporting unit operating margins on the revenue streams within each reporting unit, adjusting historical margins for the projected impact of current market trends on both fixed and variable costs.
Expected future after-tax operating cash flows of each reporting unit are discounted to a present value using a risk-adjusted discount rate. Estimates of future cash flows require management to make significant assumptions regarding future operating performance including the projected mix of revenue streams within each reporting unit, projected operating margins, the amount and timing of capital investments and the overall probability of achieving the projected cash flows, as well as future economic conditions, which may result in actual future cash flows that are different than management’s estimates. The discount rate, which is intended to reflect the risks inherent in future cash flow projections, used in estimating the present value of future cash flows, is based on estimates of the WACC of market participants relative to the reporting units. Financial and credit market volatility can directly impact certain inputs and assumptions used to develop the WACC. The rapid and sustained decline in the energy markets served by our EWDS and International reporting units, exacerbated by the uncertainty surrounding the impact of the COVID-19 pandemic and foreign oil production increases,
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has inherently increased the risk associated with the future cash flows of these reporting units. Accordingly, when performing the Interim Assessment, we increased the discount rates and decreased the projected capital investment for each reporting unit compared to the assumptions used in the initial fair value assessment in connection with the NRC Merger on November 1, 2019. We believe these changes are reflective of market participant inputs in consideration of the current economic uncertainty.
We also considered the estimated fair value of our EWDS and International reporting units under a market-based approach by applying industry-comparable multiples of revenues and operating earnings to reporting unit revenues and operating earnings. The lack of a broad base of publicly available market data specific to the industry in which we operate, combined with the general market volatility attributable to the COVID-19 pandemic, results in a wide range of currently observable market multiples. Accordingly, we applied less weight to the estimated fair value of our reporting units calculated under the market-based approach (10%) compared to the income approach (90%) described above.
We believe that the discount rates, projected cash flows and other inputs and assumptions used in the Interim Assessment are consistent with those that a market participant would use based on the events described above and are reflective of the current market assessment of the fair value of our EWDS and International reporting units. In addition, we believe that our estimates and assumptions about future revenues and margin projections in the Interim Assessment were reasonable and consistent with the current economic uncertainty, both in general and specific to the energy markets served by our EWDS and International reporting units.
During the three months ended June 30, 2020, we did not identify any events that occurred or circumstances that changed that would indicate the fair value of our EWDS and International reporting units may be below their respective carrying amounts. Accordingly, as of June 30, 2020, we believe the carrying values of our EWDS and International reporting units approximates their fair values. As such, there is a risk of additional goodwill impairment to either or both reporting units if future events related to the respective reporting unit are less favorable than what we have assumed or estimated in our Interim Assessment. We will continue to monitor events occurring or circumstances changing which may suggest that goodwill should be reevaluated during future interim periods prior to the annual impairment test. These events and circumstances include, but are not limited to, a further sustained decline in energy commodity prices and unanticipated impacts from the COVID-19 pandemic, as well as quantitative and qualitative factors specific to each reporting unit which indicate potential events that would more likely than not reduce the fair value of the reporting unit below its carrying amount. Additionally, the carrying values of our EWDS and International reporting units are based on preliminary estimates of their acquisition date fair values. As such, changes to these preliminary fair value estimates may result in an adjustment, during the measurement period, to the impairment charges recognized in the first quarter of 2020. See Note 3 for additional information on the preliminary nature of the NRC Merger purchase price allocation.
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Intangible assets, net consisted of the following:
| | | | | | | | | | | | | | | | | | |
| | June 30, 2020 | | December 31, 2019 | ||||||||||||||
| | | | | Accumulated | | | | | | | | Accumulated | | | | ||
$s in thousands |
| Cost |
| Amortization |
| Net |
| Cost |
| Amortization |
| Net | ||||||
Amortizing intangible assets: | | | | | | | | | | | | | | | | | | |
Permits, licenses and lease | | $ | 173,435 | | $ | (20,492) | | $ | 152,943 | | $ | 174,339 | | $ | (18,707) | | $ | 155,632 |
Customer relationships | | | 333,491 | | | (48,275) | | | 285,216 | | | 333,090 | | | (35,254) | | | 297,836 |
Technology - formulae and processes | |
| 6,670 | |
| (2,035) | |
| 4,635 | |
| 6,964 | ��� |
| (2,013) | |
| 4,951 |
Customer backlog | |
| 3,652 | |
| (2,204) | |
| 1,448 | |
| 3,652 | |
| (2,022) | |
| 1,630 |
Tradename | |
| 10,390 | | | (6,457) | | | 3,933 | | | 10,390 | | | (4,832) | | | 5,558 |
Developed software | | | 2,884 | | | (2,018) | | | 866 | | | 2,895 | | | (1,884) | | | 1,011 |
Non-compete agreements | |
| 5,528 | |
| (3,063) | |
| 2,465 | |
| 5,455 | |
| (1,694) | |
| 3,761 |
Internet domain and website | | | 536 | | | (170) | | | 366 | | | 536 | | | (156) | | | 380 |
Database | | | 384 | | | (198) | | | 186 | | | 388 | | | (191) | | | 197 |
Total amortizing intangible assets | |
| 536,970 | |
| (84,912) | |
| 452,058 | |
| 537,709 | |
| (66,753) | |
| 470,956 |
Non-amortizing intangible assets: | | | | | | | | | | | | | | | | | | |
Permits and licenses | |
| 103,790 | | | — | |
| 103,790 | |
| 103,816 | | | — | |
| 103,816 |
Tradename | |
| 125 | | | — | | | 125 | |
| 130 | | | — | | | 130 |
Total intangible assets | | $ | 640,885 | | $ | (84,912) | | $ | 555,973 | | $ | 641,655 | | $ | (66,753) | | $ | 574,902 |
In connection with the interim goodwill impairment assessment of the EWDS and International reporting units in the first quarter of 2020, we also assessed the reporting units’ finite-lived tangible and intangible assets for impairment as of March 31, 2020. Based on the results of the assessment, the carrying amounts of the finite-lived tangible and intangible assets did not exceed the estimated undiscounted cash flows of the asset groups and, as a result, 0 impairment charges were recorded in the first quarter of 2020.
During the six months ended June 30, 2020, the Company acquired Impact Environmental Services, Inc. and recorded $300,000 of goodwill and $900,000 of amortizing intangible assets (consisting primarily of customer relationships). See Note 3 for additional information.
Amortization expense for the three months ended June 30, 2020 and 2019 was $9.2 million and $2.9 million, respectively. Amortization expense for the six months ended June 30, 2020 and 2019 was $18.6 million and $5.7 million, respectively. Foreign intangible asset carrying amounts are affected by foreign currency translation.
NOTE 11. DEBT
Long-term debt consisted of the following:
| | | | | | |
| | June 30, | | December 31, | ||
$s in thousands |
| 2020 |
| 2019 | ||
Revolving credit facility | | $ | 420,978 | | $ | 327,000 |
Term loan | | | 447,750 | | | 450,000 |
Unamortized term loan discount and debt issuance costs | | | (7,228) | | | (7,799) |
Total debt | | | 861,500 | | | 769,201 |
Current portion of long-term debt and Short-term borrowings | | | (7,337) | | | (3,359) |
Long-term debt | | $ | 854,163 | | $ | 765,842 |
Credit Agreement
On April 18, 2017, US Ecology Holdings, Inc. (f/k/a US Ecology, Inc.) (“Predecessor US Ecology”), now a wholly-owned subsidiary of the Company, entered into a new senior secured credit agreement (as amended, restated, supplemented or otherwise modified through the date hereof, the “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.,
23
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 $40.0 million sublimit for the issuance of swingline loans used to fund short-term working capital requirements. The 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 Credit Agreement was amended in November 2019 in connection with the NRC Merger and further amended on June 26, 2020 pursuant to the Third Amendment (as defined below).
The Revolving Credit Facility provides up to $500.0 million of revolving credit loans or letters of credit with the use of proceeds restricted solely for working capital and other general corporate purposes (including acquisitions and capital expenditures). Except as modified by the Third Amendment as described below, under the Revolving Credit Facility, revolving credit loans are available based on a base rate (as defined in the Credit Agreement) or the London Inter-Bank Offered Rate (“LIBOR”), at the Company’s option, plus an applicable margin which is determined according to a pricing grid under which the interest rate decreases or increases based on our ratio of funded debt to consolidated earnings before interest, taxes, depreciation and amortization (as defined in the Credit Agreement), as set forth in the table below:
| | |
Consolidated 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% |
During the six months ended June 30, 2020, the effective interest rate on the Revolving Credit Facility, after giving effect to the impact of our interest rate swap and the amortization of the loan discount and debt issuance costs, was 3.70%. Interest only payments are due either quarterly or on the last day of any interest period, as applicable.
Except as modified by the Third Amendment as described below, 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 based upon Predecessor US Ecology’s total net leverage ratio (as defined in the Credit Agreement). The maximum letter of credit capacity under the Revolving Credit Facility is $75.0 million and the Credit Agreement provides for a letter of credit fee equal to the applicable margin for LIBOR loans under the Revolving Credit Facility. At June 30, 2020, there were $417.0 million of revolving credit loans outstanding on the Revolving Credit Facility. These revolving credit loans are due upon the earliest to occur of (i) November 1, 2024 (or, with respect to any lender, such later date as requested by us and accepted by such lender), (ii) the date of termination of the entire revolving credit commitment (as defined in the Credit Agreement) by us, and (iii) 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 $40.0 million swingline loan sublimit under the Revolving Credit Facility. Predecessor US Ecology’s revolving credit loans outstanding under the Revolving Credit Facility are not subject to repayment through the Sweep Arrangement. As of June 30, 2020, there were $4.0 million in borrowings outstanding subject to the Sweep Arrangement.
As of June 30, 2020, the availability under the Revolving Credit Facility was $68.8 million with $10.2 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
24
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 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 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 Credit Agreement), in an amount equal to such excess. Subject to certain exceptions, the Credit Agreement provides for mandatory prepayment upon certain asset dispositions, casualty events and issuances of indebtedness.
Pursuant to (i) an unconditional guarantee agreement and (ii) a collateral agreement, each entered into by Predecessor US Ecology and its domestic subsidiaries on April 18, 2017, Predecessor US Ecology’s obligations under the 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 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 Credit Agreement), among other things, amounts outstanding under the Credit Agreement may be accelerated and the commitments may be terminated.
The 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 Credit Agreement). Except as further modified by the Third Amendment as described below, our consolidated total net leverage ratio as of the last day of the respective fiscal quarter, may not exceed the maximum consolidated total net leverage ratios set forth in the table below, subject to certain exceptions:
Fiscal Quarter(s) | Consolidated Total Net Leverage Ratio |
Fiscal Quarters ending June 30, 2017 through September 30, 2019 | 3.50:1.00 |
Fiscal Quarters ending December 31, 2019 and thereafter | 4.00:1.00 |
Our consolidated interest coverage ratio as of the last day of any fiscal quarter, commencing with the fiscal quarter ending June 30, 2017, may not be less than 3.00 to 1.00.
Amendments to the Credit Agreement
On August 6, 2019, Predecessor US Ecology entered into the first amendment (the “First Amendment”) to the 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 the indebtedness of NRC and pay related transaction expenses in connection with the NRC Merger, modified the accordion feature allowing Predecessor US Ecology 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 Credit Agreement. Effective November 1, 2019, the Second Amendment, among other things, amended the 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
25
of NRC in connection with the NRC Merger, to pay certain fees, costs and expenses incurred in connection with the NRC Merger 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). During the six months ended June 30, 2020, the effective interest rate on the term loan, including the impact of the amortization of debt issuance costs, was 3.82%.
On June 26, 2020, Predecessor US Ecology entered into the third amendment (the “Third Amendment”) to the Credit Agreement. Among other things, the Third Amendment amended the Credit Agreement to provide a covenant relief period through the earlier of March 31, 2022 and the date Predecessor US Ecology elects to end such covenant relief period pursuant to the terms therein. During the covenant relief period, the Third Amendment increased Predecessor US Ecology’s consolidated total net leverage ratio requirement as of the end of each fiscal quarter to certain ratios above the 4.00 to 1.00 ratio in effect immediately before giving effect to the Third Amendment, subject to compliance with certain restrictions on restricted payments and permitted acquisitions during such covenant relief period. Furthermore, during the covenant relief period, under the Revolving Credit Facility, revolving credit loans are available based on a base rate (as defined in the Credit Agreement) or LIBOR, at the Company’s option, plus an applicable margin which is determined according to a pricing grid under which the interest rate decreases or increases based on our ratio of funded debt to consolidated earnings before interest, taxes, depreciation and amortization (as defined in the Credit Agreement), as set forth in the table below:
| | |
Consolidated Total Net Leverage Ratio | LIBOR Rate Loans Interest Margin | Base Rate Loans Interest Margin |
Equal to or greater than 4.50 to 1.00 | 2.50% | 1.50% |
Equal to or greater than 4.00 to 1.00, but less than 4.50 to 1.00 | 2.25% | 1.25% |
Equal to or greater than 3.25 to 1.00, but less than 4.00 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% |
Additionally, during the covenant relief period, Predecessor US Ecology is required to pay a commitment fee ranging from 0.175% to 0.40% on the average daily unused portion of the Revolving Credit Facility, with such commitment fee to be based upon Predecessor US Ecology’s total net leverage ratio (as defined in the Credit Agreement).
At June 30, 2020, we were in compliance with all of the financial covenants in the Credit Agreement.
Interest Rate Swap
In March 2020, the Company entered into an interest rate swap agreement with Wells Fargo, effectively fixing the interest rate on $500.0 million, or approximately 58%, of the Revolving Credit Facility and term loan borrowings outstanding as of June 30, 2020. In connection with our entry into the March 2020 interest rate swap, we terminated our existing interest rate swap prior to its scheduled maturity date of June 2021. As the original hedged forecasted transaction (periodic interest payments on our variable-rate debt) remains probable, the $1.8 million net loss related to the terminated swap reported in AOCI at the termination date will be amortized as additional interest expense over its original maturity.
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
26
and our intended operation of the landfill cell are triggered and recorded when the cell is placed into service and waste is initially disposed in the landfill cell. The fair value is based on the total estimated costs to close the landfill cell and perform post-closure activities once the landfill cell has reached capacity and is no longer accepting waste. We perform periodic reviews of both non-operating and operating facilities and revise accruals for estimated closure and post-closure, remediation or other costs as necessary. Recorded liabilities are based on our best estimates of current costs and are updated periodically to include the effects of existing technology, presently enacted laws and regulations, inflation and other economic factors.
Changes to closure and post-closure obligations consisted of the following:
| | | | | | |
| | Three Months Ended | | Six Months Ended | ||
$s in thousands |
| June 30, 2020 | | June 30, 2020 | ||
Closure and post-closure obligations, beginning of period | | $ | 87,096 | | $ | 86,383 |
Accretion expense | |
| 1,267 | |
| 2,533 |
Payments | |
| (380) | |
| (798) |
Foreign currency translation | |
| 63 | |
| (72) |
Closure and post-closure obligations, end of period | |
| 88,046 | |
| 88,046 |
Less current portion | |
| (3,374) | |
| (3,374) |
Long-term portion | | $ | 84,672 | | $ | 84,672 |
NOTE 13. INCOME TAXES
We have historically calculated the provision for income taxes during interim reporting periods by applying an estimate of the annual effective tax rate “AETR” for the full fiscal year to “ordinary” income or loss (pretax income or loss excluding unusual or infrequently occurring discrete items) for the reporting period. We have used a discrete effective tax rate method to calculate taxes for the six-month period ended June 30, 2020. We determined that since small changes in estimated “ordinary” income would result in significant changes in the estimated AETR, the historical method would not provide a reliable estimate for the six-month period ended June 30, 2020.
Our effective tax rate for the three months ended June 30, 2020 was (77.4)%, down from 29.2% for the three months ended June 30, 2019. The decrease in our effective tax rate for the three months ended June 30, 2020 compared to the three months ended June 30, 2019 was primarily due to income tax expense on foreign earnings in the three months ended June 30, 2020, partially offset by income tax benefit on domestic earnings in the three months ended June 30, 2020. Our effective tax rate for the six months ended June 30, 2020 was (0.7)%, down from 28.6% for the six months ended June 30, 2019. The decrease in our effective tax rate for the six months ended June 30, 2020 compared to the six months ended June 30, 2019 was primarily due to non-deductible goodwill impairment charges as well as income tax expense on foreign earnings in the six months ended June 30, 2020, partially offset by income tax benefit on domestic earnings in the six months ended June 30, 2020.
Gross unrecognized tax benefits, included in Other long-term liabilities in the consolidated balance sheets, were $8.4 million and $8.3 million as of June 30, 2020 and December 31, 2019, respectively. The gross unrecognized tax benefits, if recognized by the Company, will result in a reduction of approximately $300,000 to the provision for income taxes thereby favorably impacting the Company’s effective tax rate. The remaining $8.1 million is related to the acquired NRC net operating losses and is recorded as a reduction to our net operating losses deferred tax asset. We do not anticipate that the amount of existing unrecognized tax benefits will significantly increase or decrease within the next 12 months. Accrued interest and penalties related to unrecognized tax benefits are recorded as interest expense and selling, general and administrative expenses, respectively. The total accrued interest related to unrecognized tax benefits as of June 30, 2020 and December 31, 2019 were not significant. There is no accrual for penalties.
The Company files income tax returns in the United States and various state, local and foreign jurisdictions. The Company is subject to examination by the IRS for tax years 2016 through 2019. The 2014 through 2019 state tax returns are subject to examination by state tax authorities. US Ecology Sarnia is currently under examination by the Canadian Revenue Agency for the pre-acquisition years 2016 and 2017. The tax years 2015 through 2019 remain subject to examination in
27
our significant foreign jurisdictions. The Company does not anticipate any material change as a result of any current examinations in progress.
NOTE 14. EARNINGS (LOSS) PER SHARE
| | | | | | | | | | | | |
| | Three Months Ended June 30, | ||||||||||
| | 2020 | | 2019 | ||||||||
$s and shares in thousands, except per share amounts |
| Basic |
| Diluted |
| Basic |
| Diluted | ||||
Net (loss) income | | $ | (5,183) | | $ | (5,183) | | $ | 15,491 | | $ | 15,491 |
Weighted average basic shares outstanding | |
| 31,054 | |
| 31,054 | |
| 22,006 | |
| 22,006 |
| | | | | | | | | | | | |
Dilutive effect of share-based awards and warrants | | | | |
| — | | | | |
| 202 |
Weighted average diluted shares outstanding | | | | |
| 31,054 | | | | |
| 22,208 |
| | | | | | | | | | | | |
(Loss) earnings per share | | $ | (0.17) | | $ | (0.17) | | $ | 0.70 | | $ | 0.70 |
Anti-dilutive shares excluded from calculation | | | | |
| 4,260 | | | | |
| 92 |
| | | | | | | | | | | | |
| | Six Months Ended June 30, | ||||||||||
| | 2020 | | 2019 | ||||||||
$s and shares in thousands, except per share amounts |
| Basic |
| Diluted |
| Basic |
| Diluted | ||||
Net (loss) income | | $ | (303,269) | | $ | (303,269) | | $ | 23,534 | | $ | 23,534 |
Weighted average basic shares outstanding | |
| 31,179 | |
| 31,179 | |
| 21,997 | |
| 21,997 |
| | | | | | | | | | | | |
Dilutive effect of share-based awards | | | | |
| — | | | | |
| 206 |
Weighted average diluted shares outstanding | | | | |
| 31,179 | | | | |
| 22,203 |
| | | | | | | | | | | | |
Loss (earnings) per share | | $ | (9.73) | | $ | (9.73) | | $ | 1.07 | | $ | 1.06 |
Anti-dilutive shares excluded from calculation | | | | |
| 4,195 | | | | |
| 86 |
NOTE 15. EQUITY
Stock Repurchase Program
On June 1, 2016, the Company’s Board of Directors authorized the repurchase of up to $25.0 million of the Company’s outstanding common stock. On May 29, 2018, the repurchase program was extended. On December 30, 2019, the Company’s Board of Directors authorized the repurchase of up to $25.0 million of the Company’s outstanding warrants (such dollar amount considered in the aggregate with the dollar amount of shares of common stock repurchased by the Company, if any, under the Company’s share repurchase program) as part of the Company’s share repurchase program. On June 6, 2020, our authorization by the Company’s Board of Directors to repurchase the Company’s outstanding shares of common stock and warrants under the share repurchase program expired. In the future, the Board of Directors may consider reauthorizing the repurchase program at any time, and the timing of any future repurchases of common stock or warrants will be based upon prevailing market conditions and other factors. The Company may from time to time also consider other options for repurchasing some or all of its warrants, including but not limited to a tender offer for all of the outstanding warrants. During the six months ended June 30, 2020, the Company repurchased 397,600 shares of common stock in an aggregate amount of $17.3 million under the repurchase program.
Omnibus Incentive Plan
On May 27, 2015, the stockholders of Predecessor US Ecology approved the Omnibus Incentive Plan (as amended, “Omnibus Plan”), which was approved by Predecessor US Ecology’s Board of Directors on April 7, 2015. In connection with the closing of the NRC Merger, the Company assumed the Omnibus Plan by adopting the Amended and Restated US
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Ecology, Inc. Omnibus Incentive Plan for the purposes of issuing replacement awards to award recipients under the Omnibus Plan pursuant to the Merger Agreement and for the issuance of additional awards in the future.
The Omnibus Plan was developed to provide additional incentives through equity ownership in US Ecology and, as a result, encourage employees and directors to contribute to our success. The Omnibus Plan provides, among other things, the ability for the Company to grant restricted stock, performance stock, options, stock appreciation rights, restricted stock units, performance stock units and other share-based awards or cash awards to officers, employees, consultants and non-employee directors.
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 June 30, 2020, 502,617 shares of common stock remain available for grant under the Omnibus Plan.
Subsequent to the approval of the Omnibus Plan by Predecessor US Ecology in May 2015, we stopped granting equity awards under our 2008 Stock Option Incentive Plan (“2008 Stock Option Plan”). However, in connection with the closing of the NRC Merger, the Company assumed the 2008 Stock Option Plan for the purpose of issuing replacement awards to award recipients thereunder and will remain in effect solely for the settlement of awards granted under such plan. No shares that are reserved but unissued under the 2008 Stock Option Plan or that are outstanding under the 2008 Stock Option Plan and reacquired by the Company for any reason will be available for issuance under the Omnibus Plan.
In addition, in connection with the closing of the NRC Merger, the Company assumed the NRC Group Holdings Corp. 2018 Equity Incentive Plan previously maintained by NRC by adopting the Amended and Restated US Ecology, Inc. 2018 Equity and Incentive Compensation Plan. Like the 2008 Stock Option Plan, the NRC Group Holdings Corp. 2018 Equity Incentive Plan was assumed by the Company solely for the purpose of issuing replacement awards to award recipients pursuant to the Merger Agreement, and no future grants may be made under the 2018 Equity and Incentive Compensation Plan.
PSUs, RSUs and Restricted Stock
On January 24, 2020, the Company granted 5,358 PSUs to certain employees. Each PSU represents the right to receive, on the settlement date, 1 share of the Company’s common stock. The actual number of PSUs that will vest and be settled in shares is determined based on the achievement of certain milestones. The fair value of the PSUs estimated on the grant date was $54.55 per unit. Compensation expense is recorded over the awards’ milestone measurement period.
A summary of our PSU, restricted stock and RSU activity for the six months ended June 30, 2020 is as follows:
| | | | | | | | | | | | | | | |
| | PSUs | | Restricted Stock | | RSUs | |||||||||
| | | | Weighted | | | | Weighted | | | | Weighted | |||
| | | | Average | | | | Average | | | | Average | |||
| | | | Grant Date | | | | Grant Date | | | | Grant Date | |||
|
| Shares |
| Fair Value |
| Shares |
| Fair Value |
| Shares |
| Fair Value | |||
Outstanding as of December 31, 2019 |
| 42,711 | | $ | 61.11 |
| 64,654 | | $ | 55.62 | | 131,199 | | $ | 59.05 |
Granted |
| 5,358 | | | 54.55 |
| 51,700 | | | 48.35 | | 110,540 | | | 33.30 |
Vested |
| (11,929) | |
| 62.17 |
| (43,588) | |
| 53.93 | | (46,871) | |
| 56.08 |
Cancelled, expired or forfeited |
| — | |
| — |
| — | |
| — | | (11,482) | |
| 57.22 |
Outstanding as of June 30, 2020 |
| 36,140 | | $ | 59.79 |
| 72,766 | | $ | 51.47 | | 183,386 | | $ | 44.40 |
During the six months ended June 30, 2020, 11,929 PSUs vested and PSU holders earned 7,226 shares of the Company’s common stock.
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Stock Options
A summary of our stock option activity for the six months ended June 30, 2020 is as follows:
| | | | | |
| | | | Weighted | |
| | | | Average | |
| | | | Exercise | |
|
| Shares |
| Price | |
Outstanding as of December 31, 2019 |
| 293,588 | | $ | 48.23 |
Granted |
| 78,700 | | | 54.20 |
Exercised |
| (6,880) | |
| 34.69 |
Cancelled, expired or forfeited |
| (5,415) | |
| 42.43 |
Outstanding as of June 30, 2020 |
| 359,993 | | $ | 49.88 |
Exercisable as of June 30, 2020 |
| 243,263 | | $ | 47.02 |
During the six months ended June 30, 2020, option holders tendered 3,738 options in connection with options exercised via net share settlement.
Treasury Stock
During the six months ended June 30, 2020, the Company repurchased 17,169 shares of the Company’s common stock in connection with the net share settlement of employee equity awards at an average cost of $57.91 per share and repurchased 397,600 shares of the Company’s common stock under our stock repurchase program at an average cost of $43.61 per share.
Dividends
On March 31, 2020, the Board of Directors approved a plan to suspend quarterly cash dividends, beginning with the second quarter of 2020. The Company did not pay dividends during the three months ended June 30, 2020 and paid dividends of $0.18 per common share during the three months ended June 30, 2019. The Company paid dividends of $0.18 per common share and $0.36 per common share during the six months ended June 30, 2020 and 2019, respectively.
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.
In December 2010, National Response Corporation, a subsidiary of NRC acquired by the Company in the NRC Merger, was named as one of many “Dispersant Defendants” in multi-district litigation, arising out of the explosion of the BP Deepwater Horizon (“BP”) oil rig, filed in the U.S. District Court for the Eastern District of Louisiana (“In re Deepwater Horizon” or the “MDL”). The claims against National Response Corporation, and other “Dispersant Defendants,” were brought by workers and others who alleged injury arising from post-explosion clean–up efforts, including particularly the use of certain chemical dispersants. In January 2013, the Court approved a Medical Benefits Class Action Settlement, which, among other things, provided for a “class wide” settlement as well as a release of claims against Dispersant Defendants, including National Response Corporation. Further, National Response Corporation successfully moved the court to dismiss all claims against it based on derivative immunity, as it was acting at the direction of the U.S. Government.
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In early 2018, BP began asserting an alleged contractual right of indemnity against National Response Corporation and others in post-settlement lawsuits brought by persons who had either chosen not to participate in the class-wide agreement or whose injuries were allegedly manifest after the period covered by the claim submission process. The Company advised BP that it considers the attempt to bring National Response Corporation back into previously settled litigation to be improper and moved for a declaratory judgment that it owes no indemnity or contribution to BP, raising various arguments, including BP’s own actions and conduct over the preceding nine years with respect to these claims (including its failure to seek indemnity) and the resultant prejudice to National Response Corporation, BP’s waiver of any indemnity, and the court’s prior finding that National Response Corporation is entitled to derivative immunity. In response, BP asserted counterclaims against National Response Corporation for a declaratory judgment that National Response Corporation must indemnify BP under certain circumstances and for unjust enrichment. National Response Corporation successfully moved to dismiss the unjust enrichment claim. The parties filed simultaneous judgment on the pleadings briefs in February 2020, and all oppositions were filed on March 16, 2020. On May 4, 2020, the court found in favor of National Response Corporation, and held that the Company is not liable to BP or any back end litigation plaintiffs for any damages related to the Deepwater Horizon oil spill. BP timely appealed the ruling on June 11, 2020. The Company is currently unable to estimate the range of possible losses associated with this proceeding. However, the Company also believes that, were it deemed to have liability arising out of or related to BP’s indemnity claims, such liability would be covered by an indemnity by SEACOR Holdings Inc., the former owner of National Response Corporation, in favor of National Response Corporation and its affiliates.
In January 2019, Kevin Sullivan, a driver for NRC from May 1, 2018 to August 22, 2018 filed a class action complaint against NRC in California Superior Court (Kevin Sullivan et. Al. v. National Response Corp., NRC Environmental Services, Inc. and Paul Taveira et al.) alleging the failure by the defendants to provide meal and rest breaks required by California law and requiring employees to work off the clock. Mr. Sullivan’s complaint also asserted a claim under the California Labor Code Private Attorneys General Act (“PAGA”), which permits an employee to assert a claim for violations of certain California Labor Code provisions on behalf of all aggrieved employees to recover statutory penalties that could be recovered by the State of California. On April 17, 2019, NRC filed a motion to compel individual arbitration, strike Mr. Sullivan’s class action claims and stay the PAGA claim pending the outcome of Mr. Sullivan’s individual claim; the court subsequently granted NRC’s motion to compel. In response, Mr. Sullivan amended his complaint to dismiss the class claims without prejudice and proceed solely with the PAGA claim. Unlike class claims, PAGA claims cannot be waived by an employee’s agreement to individual arbitration; therefore, the case is proceeding as a pure representative PAGA claim only, absent any individual or class claims against the Company or NRC. The parties participated in a confidential mediation on August 3, 2020, and tentatively reached a settlement resolving the pending PAGA claim, subject to the parties’ final agreement on a definitive settlement agreement and court approval of such settlement agreement.
On November 17, 2018, an explosion occurred at our Grand View, Idaho facility, resulting in 1 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. In addition to initiating and conducting our own investigation into the incident, we fully cooperated with the Idaho Department of Environmental Quality, the U.S. Environmental Protection Agency and the Occupational Safety and Health Administration (“OSHA”) to support their comprehensive and independent investigations of the incident. On January 10, 2020, we entered into a settlement agreement with OSHA settling a complaint made by OSHA relating to the incident for $50,000. On January 28, 2020, the Occupational Safety and Health Review Commission issued an order terminating the proceeding relating to such OSHA complaint. We have not otherwise been named as a defendant in any action relating to the incident. 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
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recognized insurance recoveries of $462,000 for the six months ended June 30, 2020, related to expenses incurred to continue limited operations at the facility.
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 2 reportable segments reflecting our internal management reporting structure and nature of services offered as follows:
Environmental Services - This segment provides a broad range of specialty 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 specialty field services and total waste management solutions to commercial and industrial facilities and to government entities through our 10-day transfer facilities and at customer sites, both domestic and international. Specialty field services include standby services, emergency response, industrial cleaning and maintenance, remediation, lab packs, retail services, transportation, and other services. Total waste management services include on-site management, waste characterization, transportation and disposal of non- hazardous and hazardous waste.
The operations not managed through our 2 reportable segments are recorded as “Corporate.” Corporate selling, general and administrative expenses include typical corporate items such as legal, accounting and other items of a general corporate nature. Income taxes are assigned to Corporate, but all other items are included in the segment where they originated. Inter-company transactions have been eliminated from the segment information and are not significant between segments.
Summarized financial information of our reportable segments is as follows:
| | | | | | | | | | | | |
| | Three Months Ended June 30, 2020 | ||||||||||
| | | | Field & | | | | | | | ||
| | Environmental | | Industrial | | | | | | | ||
$s in thousands |
| Services |
| Services |
| Corporate |
| Total | ||||
Revenue | | $ | 110,409 | | $ | 103,509 | | $ | — | | $ | 213,918 |
Depreciation, amortization and accretion | | $ | 15,932 | | $ | 12,276 | | $ | 670 | | $ | 28,878 |
Capital expenditures | | $ | 10,071 | | $ | 5,177 | | $ | 1,578 | | $ | 16,826 |
Total assets | | $ | 990,441 | | $ | 856,575 | | $ | 109,133 | | $ | 1,956,149 |
| | | | | | | | | | | | |
| | Three Months Ended June 30, 2019 | ||||||||||
| | | | Field & | | | | | | | ||
| | Environmental | | Industrial | | | | | | | ||
$s in thousands |
| Services |
| Services |
| Corporate |
| Total | ||||
Revenue | | $ | 112,844 | | $ | 42,958 | | $ | — | | $ | 155,802 |
Depreciation, amortization and accretion | | $ | 10,377 | | $ | 2,151 | | $ | 597 | | $ | 13,125 |
Capital expenditures | | $ | 14,455 | | $ | 2,059 | | $ | 920 | | $ | 17,434 |
Total assets | | $ | 725,311 | | $ | 167,985 | | $ | 68,120 | | $ | 961,416 |
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| | | | | | | | | | | | |
| | Six Months Ended June 30, 2020 | ||||||||||
| | | | Field & | | | | | | | ||
| | Environmental | | Industrial | | | | | | | ||
$s in thousands |
| Services |
| Services |
| Corporate |
| Total | ||||
Revenue | | $ | 237,154 | | $ | 217,484 | | $ | — | | $ | 454,638 |
Depreciation, amortization and accretion | | $ | 31,974 | | $ | 24,291 | | $ | 1,298 | | $ | 57,563 |
Capital expenditures | | $ | 21,603 | | $ | 10,466 | | $ | 3,888 | | $ | 35,957 |
Total assets | | $ | 990,441 | | $ | 856,575 | | $ | 109,133 | | $ | 1,956,149 |
| | | | | | | | | | | | |
| | Six Months Ended June 30, 2019 | ||||||||||
| | | | Field & | | | | | | | ||
| | Environmental | | Industrial | | | | | | | ||
$s in thousands |
| Services |
| Services |
| Corporate |
| Total | ||||
Revenue | | $ | 205,177 | | $ | 81,662 | | $ | — | | $ | 286,839 |
Depreciation, amortization and accretion | | $ | 20,003 | | $ | 4,282 | | $ | 901 | | $ | 25,186 |
Capital expenditures | | $ | 21,296 | | $ | 2,108 | | $ | 1,253 | | $ | 24,657 |
Total assets | | $ | 725,311 | | $ | 167,985 | | $ | 68,120 | | $ | 961,416 |
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 impairment charges, gain on property insurance recoveries, business development and integration expenses and other income/expense. In 2019, we updated our Adjusted EBITDA definition to include adjustments for business development and integration expenses and gain on property insurance recoveries. Throughout this Quarterly Report on Form 10-Q, our Adjusted EBITDA results for all periods presented have been recast to reflect these adjustments. 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; |
● | 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; and |
● | Adjusted EBITDA does not reflect our business development and integration expenses. |
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A reconciliation of Net income to Adjusted EBITDA is as follows:
| | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, | ||||||||
$s in thousands |
| 2020 |
| 2019 |
| 2020 |
| 2019 | ||||
Net (loss) income | | $ | (5,183) | | $ | 15,491 | | $ | (303,269) | | $ | 23,534 |
Income tax expense | | | 2,261 | | | 6,395 | | | 1,998 | | | 9,436 |
Interest expense | | | 7,853 | | | 3,588 | | | 17,163 | | | 7,618 |
Interest income | | | (153) | | | (202) | | | (242) | | | (409) |
Foreign currency loss (gain) | | | 671 | | | 384 | | | (266) | | | 523 |
Other income | | | (125) | | | (122) | | | (296) | | | (232) |
Property and equipment impairment charges | | | — | | | — | | | — | | | 25 |
Goodwill impairment charges | | | — | | | — | | | 300,300 | | | — |
Depreciation and amortization of plant and equipment | | | 18,418 | | | 9,129 | | | 36,396 | | | 17,254 |
Amortization of intangible assets | | | 9,193 | | | 2,863 | | | 18,634 | | | 5,674 |
Share-based compensation | | | 1,524 | | | 1,245 | | | 3,088 | | | 2,467 |
Accretion and non-cash adjustment of closure & post-closure liabilities | | | 1,267 | | | 1,133 | | | 2,533 | | | 2,258 |
Gain on property insurance recoveries | | | — | | | (4,500) | | | — | | | (9,153) |
Business development and integration expenses | | | 2,973 | | | 2,530 | | | 5,880 | | | 2,671 |
Adjusted EBITDA | | $ | 38,699 | | $ | 37,934 | | $ | 81,919 | | $ | 61,666 |
Adjusted EBITDA, by operating segment, is as follows:
| | | | | | | ��� | | | | | |
|
| Three Months Ended June 30, |
| Six Months Ended June 30, | ||||||||
$s in thousands | | 2020 |
| 2019 | | 2020 |
| 2019 | ||||
Environmental Services |
| $ | 43,415 | | $ | 47,056 |
| $ | 89,539 | | $ | 82,316 |
Field & Industrial Services |
|
| 13,263 | |
| 5,022 |
|
| 27,742 | |
| 7,576 |
Corporate |
|
| (17,979) | |
| (14,144) |
|
| (35,362) | |
| (28,226) |
Total |
| $ | 38,699 | | $ | 37,934 |
| $ | 81,919 | | $ | 61,666 |
Property and Equipment and Intangible Assets Outside of the United States
We provide services primarily in the United States, Canada and the EMEA region. Long-lived assets, comprised of property and equipment and intangible assets net of accumulated depreciation and amortization, by geographic location are as follows:
| | | | | | |
|
| June 30, | | December 31, | ||
$s in thousands | | 2020 |
| 2019 | ||
United States | | $ | 937,547 | | $ | 954,102 |
Canada | |
| 65,630 | |
| 70,691 |
EMEA | | | 21,137 | | | 23,587 |
Other (1) | | | 15,237 | | | 5,290 |
Total long-lived assets | | $ | 1,039,551 | | $ | 1,053,670 |
(1) | Includes Mexico, Asia Pacific, and Latin America and Caribbean geographical regions. |
34
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the stockholders and the 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 June 30, 2020, the related consolidated statements of operations, comprehensive income, and stockholders’ equity for the three-month and-six month periods ended June 30, 2020 and 2019, and of cash flows for the six-month periods ended June 30, 2020 and 2019, 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, 2019, 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 March 2, 2020, 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, 2019, 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 |
August 7, 2020 |
35
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The information contained in this section should be read in conjunction with our unaudited consolidated financial statements and related notes thereto appearing elsewhere in this quarterly report on Form 10-Q. In this report words such as “we,” “us,” “our,” “US Ecology” and “the Company” refer to US Ecology, Inc. and its subsidiaries.
OVERVIEW
US Ecology is a leading provider of environmental services to commercial and governmental entities. The Company addresses the complex waste management and response needs of its customers, offering treatment, disposal and recycling of hazardous, non-hazardous and radioactive waste, leading emergency response and standby services, and a wide range of complementary field and industrial services. US Ecology’s focus on safety, environmental compliance and best-in-class customer service enables us to effectively meet the needs of our customers and to build long-lasting relationships.
We have a network of fixed facilities and service centers operating primarily in the United States, Canada, the United Kingdom and Mexico. Our fixed facilities include five RCRA subtitle C hazardous waste landfills, three landfills serving waste streams regulated by the RRC and one LLRW landfill. We also have various other treatment, storage and disposal facilities (“TSDF”) located throughout the United States. 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.
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 specialty material management services including transportation, recycling, treatment and disposal of hazardous, non-hazardous and radioactive waste at Company owned or operated landfill, wastewater, deep-well injection and other treatment facilities.
Field & Industrial Services - This segment provides specialty field services and total waste management solutions to commercial and industrial facilities and to government entities through our 10-day transfer facilities and at customer sites, both domestic and international. Specialty field services include standby services, emergency response, industrial cleaning and maintenance, remediation, lab packs, retail services, transportation, and other services. Total waste management services include on-site management, waste characterization, transportation and disposal of non- hazardous and hazardous waste.
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.
36
The composition of Environmental Services segment T&D revenues by waste generator industry for the three and six months ended June 30, 2020 and 2019 were as follows:
| | | | |
| | % of Treatment and Disposal Revenue (1)(2) for the | ||
| | Three Months Ended June 30, | ||
Generator Industry |
| 2020 |
| 2019 |
Chemical Manufacturing |
| 21% | | 17% |
Metal Manufacturing |
| 14% | | 18% |
Broker / TSDF |
| 12% | | 13% |
General Manufacturing |
| 10% | | 11% |
Government |
| 8% | | 11% |
Refining |
| 8% | | 9% |
Utilities |
| 8% | | 3% |
Transportation |
| 3% | | 3% |
Waste Management & Remediation |
| 2% | | 2% |
Mining, Exploration and Production |
| 2% | | 2% |
Other (3) |
| 12% | | 11% |
| | | | |
| | % of Treatment and Disposal Revenue (1)(2) for the | ||
| | Six Months Ended June 30, | ||
Generator Industry |
| 2020 |
| 2019 |
Chemical Manufacturing |
| 21% | | 16% |
Metal Manufacturing |
| 15% | | 17% |
Broker / TSDF |
| 13% | | 14% |
General Manufacturing |
| 11% | | 12% |
Government |
| 7% | | 9% |
Refining |
| 7% | | 10% |
Transportation |
| 5% | | 3% |
Utilities |
| 5% | | 3% |
Waste Management & Remediation |
| 2% | | 2% |
Mining, Exploration and Production |
| 2% | | 2% |
Other (3) |
| 12% | | 12% |
(1) | Excludes all transportation service revenue. |
(2) | Excludes NRC which was acquired on November 1, 2019. |
(3) | 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 June 30, 2020, Base Business revenue, excluding NRC, decreased 10% compared to the three months ended June 30, 2019. For the three months ended June 30, 2020, approximately 73% of our total T&D revenue, excluding NRC, was derived from our Base Business, down from 77% for the three months ended June 30, 2019. For the six months ended June 30, 2020, Base Business revenue, excluding NRC, decreased 3% compared to the six months ended June 30, 2019. For the six months ended June 30, 2020, approximately 74% of our total T&D revenue, excluding NRC, was derived from our Base Business, down from 81% for the six months ended June 30, 2019. Our business is highly competitive and no assurance can be given that we will maintain these revenue levels or increase our market share.
37
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 June 30, 2020, approximately 27% of our total T&D revenue, excluding NRC, was derived from Event Business projects, up from 23% for the three months ended June 30, 2019. For the three months ended June 30, 2020, Event Business revenue, excluding NRC, increased 12% compared to the three months ended June 30, 2019. For the six months ended June 30, 2020, approximately 26% of our total T&D revenue, excluding NRC, was derived from Event Business projects, up from 19% for the six months ended June 30, 2019. For the six months ended June 30, 2020, Event Business revenue, excluding NRC, increased 44% compared to the six months ended June 30, 2019.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.
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.
IMPACT OF THE COVID-19 PANDEMIC
The COVID-19 pandemic affected our business in the second quarter of 2020. Our core environmental services business has not been significantly impacted by the pandemic as of the date of this Quarterly Report on Form 10-Q. However, the impact of the temporary closure and staff reductions by industrial facilities have yet to be fully assessed. We currently expect lower waste volumes resulting from these closures during the third and fourth quarter of 2020, which we expect to continue until industrial facilities resume production. We also expect the Company’s services-based business to remain stable as it has shown growth as a result of our small quantity generation services and our emergency response business that has seen an uptick in COVID-19 decontamination services. However, we have also experienced, and expect to continue to experience, delays and deferments in industrial cleaning services and some of our field services as our customers limit on site visitation and delay noncritical services based on business conditions.
Our energy waste disposal services business has been and will likely continue to be adversely impacted as energy companies reduce capital expenditures as a result of downward pressure on oil, natural gas and natural gas liquid (“NGL”) prices, which have been exacerbated during the COVID-19 pandemic. Since the beginning of 2020, oil prices have moved downward due in part to concerns about the COVID-19 pandemic and its impact on near-term worldwide oil demand and due to the increase in oil production by certain members of the Organization of Petroleum Exporting Countries (“OPEC”). This oversupply of oil, compounded by a global shortage of oil storage capacity, has driven oil prices to historic lows. While OPEC agreed in April 2020 to cut production, downward pressure on prices has continued and could continue for the foreseeable future. As a result, customers in the upstream oil and gas exploration industry and some downstream
38
refineries in the energy sector have reduced capital expenditures, which has adversely affected the demand for our energy waste disposal services.
We have taken, and are continuing to take, proactive steps to manage any disruption or potential disruption to our business caused by the COVID-19 pandemic. On March 31, 2020, for example, the Company announced certain cost-saving measures including, but not limited to:
● | Cost control initiatives expected to generate approximately $15 million to $20 million of annual savings; |
● | Reductions to planned 2020 capital spending by approximately 30%, which are expected to save up to $30 million in cash; and |
● | Suspension of the Company’s quarterly dividend, commencing with the second quarter of 2020, to preserve free cash flow and enhance liquidity. |
We expect that the COVID-19 pandemic will continue to affect our results of operations for the foreseeable future. See “Part II, Item 1A – Risk Factors” in this Quarterly Report on Form 10-Q.
GOODWILL IMPAIRMENT CHARGES
We assess goodwill for impairment during the fourth quarter as of October 1 of each year, and also if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount.
In connection with our financial review and forecasting procedures performed during the first quarter of 2020, management determined that the projected future cash flows of our Energy Waste Disposal Services (“EWDS”) reporting unit and our International reporting unit (described below) indicated that the fair value of such reporting units may be below their respective carrying amounts. Accordingly, we performed an interim assessment of each reporting unit’s fair value as of March 31, 2020 (the “Interim Assessment”). Based on the results of the Interim Assessment, we recognized goodwill impairment charges of $283.6 million related to our EWDS reporting unit and $16.7 million related to our International reporting unit in the first quarter of 2020. As of June 30, 2020, after the recording these impairment charges, remaining goodwill balances for the EWDS and International reporting units were $27.2 million and $1.7 million, respectively.
Our EWDS reporting unit, a component of our Environmental Services segment, provides energy-related services including solid and liquid waste treatment and disposal, equipment cleaning and maintenance, specialty equipment rental, spill containment and site remediation for a full complement of oil and gas waste streams, predominately to upstream energy customers currently concentrated in the Eagle Ford and Permian Basins in Texas. Our International reporting unit, a component of our Field & Industrial Services segment, provides industrial and emergency response services to the offshore oil and gas sector in the North Sea and land-based industries across the Europe, Middle East and Africa (“EMEA”) region. Both our EWDS and International reporting units are dependent on energy-related exploration and production investments and expenditures by our energy industry customers. Lower crude oil prices and the volatility of such prices affect the level of investment as it impacts the ability of energy companies to access capital on economically advantageous terms or at all. In addition, energy companies decrease investments when the projected profits are inadequate or uncertain due to lower crude oil prices or volatility in crude oil prices. Such reductions in capital spending negatively impact energy waste generation and therefore the demand for our services. Recent volatility and historically low oil prices have adversely impacted customers of our EWDS reporting unit and our International reporting unit, negatively affecting demand for our services.
The principal factors contributing to the goodwill impairment charges for both the EWDS and International reporting units related to historically-low energy commodity prices reducing anticipated energy-related exploration and production investments and expenditures by our energy industry customers, which negatively impacted each reporting unit’s prospective cash flows and each reporting unit's estimated fair value. A longer-than-expected recovery in crude oil pricing and energy-related exploration and production investments became evident during the first quarter of 2020 as we assessed the projected impact of the COVID-19 pandemic and foreign oil production increases on the global demand for oil and
39
updated the long-term projections for each reporting unit which, as a result, decreased each reporting unit’s anticipated future cash flows as compared to those estimated previously.
The EWDS and International reporting units were acquired as part of the NRC Merger on November 1, 2019. As part of the preliminary purchase price allocation, the assets and liabilities of NRC were recorded at their preliminary fair value with the purchase price in excess of net fair value recorded as goodwill. Goodwill was allocated to the reporting units based on the relative preliminary fair value of each reporting unit to the total fair value of NRC.
Consistent with our annual impairment testing methodology, we utilized a weighted average of (1) an income approach and (2) a market approach to determine the fair value of each of the reporting units for the Interim Assessment. The income approach is based on the estimated present value of future cash flows for each reporting unit. The market approach is based on assumptions about how market data relates to each reporting unit.
Assessing impairment inherently involves management judgments as to the assumptions used to calculate fair value of the reporting units and the impact of market conditions on those assumptions. The key inputs that management uses in its assumptions to estimate the fair value of our reporting units under the income-based approach are as follows:
● | Projected cash flows of the reporting unit, with consideration given to projected revenues, operating margins and the levels of capital investment required to generate the corresponding revenues; and |
● | Weighted average cost of capital (“WACC”), the risk-adjusted rate used to discount the projected cash flows. |
To develop the projected cash flows of our reporting units, management considers factors that may impact the revenue streams within each reporting unit. These factors include, but are not limited to, economic conditions on both a global scale and specifically in the regions in which the reporting units operate, customer relationships, strategic plans and opportunities, required returns on invested capital and competition from other service providers. With regard to operating margins, management considers its historical reporting unit operating margins on the revenue streams within each reporting unit, adjusting historical margins for the projected impact of current market trends on both fixed and variable costs.
Expected future after-tax operating cash flows of each reporting unit are discounted to a present value using a risk-adjusted discount rate. Estimates of future cash flows require management to make significant assumptions regarding future operating performance including the projected mix of revenue streams within each reporting unit, projected operating margins, the amount and timing of capital investments and the overall probability of achieving the projected cash flows, as well as future economic conditions, which may result in actual future cash flows that are different than management’s estimates. The discount rate, which is intended to reflect the risks inherent in future cash flow projections, used in estimating the present value of future cash flows, is based on estimates of the WACC of market participants relative to the reporting units. Financial and credit market volatility can directly impact certain inputs and assumptions used to develop the WACC. The rapid and sustained decline in the energy markets served by our EWDS and International reporting units, exacerbated by the uncertainty surrounding the impact of the COVID-19 pandemic and foreign oil production increases, has inherently increased the risk associated with the future cash flows of these reporting units. Accordingly, when performing the Interim Assessment, we increased the discount rates and decreased the projected capital investment for each reporting unit compared to the assumptions used in the initial fair value assessment in connection with the NRC Merger on November 1, 2019. We believe these changes are reflective of market participant inputs in consideration of the current economic uncertainty.
We also considered the estimated fair value of our EWDS and International reporting units under a market-based approach by applying industry-comparable multiples of revenues and operating earnings to reporting unit revenues and operating earnings. The lack of a broad base of publicly available market data specific to the industry in which we operate, combined with the general market volatility attributable to the COVID-19 pandemic, results in a wide range of currently observable market multiples. Accordingly, we applied less weight to the estimated fair value of our reporting units calculated under the market-based approach (10%) compared to the income approach (90%) described above.
40
We believe that the discount rates, projected cash flows and other inputs and assumptions used in the Interim Assessment are consistent with those that a market participant would use based on the events described above and are reflective of the current market assessment of the fair value of our EWDS and International reporting units. In addition, we believe that our estimates and assumptions about future revenues and margin projections in the Interim Assessment were reasonable and consistent with the current economic uncertainty, both in general and specific to the energy markets served by our EWDS and International reporting units.
During the three months ended June 30, 2020, we did not identify any events that occurred or circumstances that changed that would indicate the fair value of our EWDS and International reporting units may be below their respective carrying amounts. Accordingly, as of June 30, 2020, we believe the carrying values of our EWDS and International reporting units approximates their fair values. As such, there is a risk of additional goodwill impairment to either or both reporting units if future events related to the respective reporting unit are less favorable than what we have assumed or estimated in our Interim Assessment. We will continue to monitor events occurring or circumstances changing which may suggest that goodwill should be reevaluated during future interim periods prior to the annual impairment test. These events and circumstances include, but are not limited to, a further sustained decline in energy commodity prices and unanticipated impacts from the COVID-19 pandemic, as well as quantitative and qualitative factors specific to each reporting unit which indicate potential events that would more likely than not reduce the fair value of the reporting unit below its carrying amount. Additionally, the carrying values of our EWDS and International reporting units are based on preliminary estimates of their acquisition date fair values. As such, changes to these preliminary fair value estimates may result in an adjustment, during the measurement period, to the impairment charges recognized in the first quarter of 2020. See Note 3 of the Notes to Consolidated Financial Statements in “Part I, Item 1. Financial Statements (Unaudited)” of this Quarterly Report on Form 10-Q for additional information on the preliminary nature of the NRC Merger purchase price allocation.
41
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2020 COMPARED TO THREE MONTHS ENDED JUNE 30, 2019
Operating results and percentage of revenues were as follows:
| | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | 2020 vs. 2019 | | |||||||||||
$s in thousands |
| 2020 |
| % |
| 2019 |
| % |
| $ Change |
| % Change |
| |||
Revenue |
| |
|
|
|
| |
|
|
|
| |
|
|
|
|
Environmental Services | | $ | 110,409 |
| 52 | % | $ | 112,844 |
| 72 | % | $ | (2,435) |
| (2) | % |
Field & Industrial Services | |
| 103,509 |
| 48 | % |
| 42,958 |
| 28 | % |
| 60,551 |
| 141 | % |
Total | | $ | 213,918 |
| 100 | % | $ | 155,802 |
| 100 | % | $ | 58,116 |
| 37 | % |
Gross Profit | |
| |
|
| |
|
|
|
| |
|
|
|
| |
Environmental Services | | $ | 40,206 |
| 36 | % | $ | 43,081 |
| 38 | % | $ | (2,875) |
| (7) | % |
Field & Industrial Services | |
| 13,605 |
| 13 | % |
| 6,502 |
| 15 | % |
| 7,103 |
| 109 | % |
Total | | $ | 53,811 |
| 25 | % | $ | 49,583 |
| 32 | % | $ | 4,228 |
| 9 | % |
Selling, General & Administrative Expenses | |
| |
|
| |
|
|
|
| |
|
|
|
| |
Environmental Services | | $ | 13,506 |
| 12 | % | $ | 2,010 |
| 2 | % | $ | 11,496 |
| 572 | % |
Field & Industrial Services | |
| 13,116 |
| 13 | % |
| 3,739 |
| 9 | % |
| 9,377 |
| 251 | % |
Corporate | |
| 21,865 |
| n/m | |
| 18,300 |
| n/m | |
| 3,565 |
| 19 | % |
Total | | $ | 48,487 |
| 23 | % | $ | 24,049 |
| 15 | % | $ | 24,438 |
| 102 | % |
Adjusted EBITDA | |
| |
|
| |
|
|
|
| |
|
|
|
| |
Environmental Services | | $ | 43,415 |
| 39 | % | $ | 47,056 |
| 42 | % | $ | (3,641) |
| (8) | % |
Field & Industrial Services | |
| 13,263 |
| 13 | % |
| 5,022 |
| 12 | % |
| 8,241 |
| 164 | % |
Corporate | |
| (17,979) |
| n/m | |
| (14,144) |
| n/m | |
| (3,835) |
| 27 | % |
Total | | $ | 38,699 |
| 18 | % | $ | 37,934 |
| 24 | % | $ | 765 |
| 2 | % |
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, gain on property insurance recoveries, business development and integration expenses and other income/expense. In 2019, we updated our Adjusted EBITDA definition to include adjustments for business development and integration expenses and gain on property insurance recoveries. Throughout this Quarterly Report on Form 10-Q, our Adjusted EBITDA results for all periods presented have been recast to reflect these adjustments. The reconciliation of Net income to Adjusted EBITDA is as follows:
| | | | | | | | | | | | |
| | Three Months Ended June 30, | | 2020 vs. 2019 | | |||||||
$s in thousands |
| 2020 |
| 2019 |
| $ Change |
| % Change |
| |||
Net (loss) income | | $ | (5,183) | | $ | 15,491 | | $ | (20,674) |
| (133) | % |
Income tax expense | |
| 2,261 | |
| 6,395 | |
| (4,134) |
| (65) | % |
Interest expense | |
| 7,853 | |
| 3,588 | |
| 4,265 |
| 119 | % |
Interest income | |
| (153) | |
| (202) | |
| 49 |
| (24) | % |
Foreign currency loss | |
| 671 | |
| 384 | |
| 287 |
| 75 | % |
Other income | |
| (125) | |
| (122) | |
| (3) |
| 2 | % |
Depreciation and amortization of plant and equipment | | | 18,418 | |
| 9,129 | |
| 9,289 |
| 102 | % |
Amortization of intangible assets | |
| 9,193 | |
| 2,863 | |
| 6,330 |
| 221 | % |
Share-based compensation | |
| 1,524 | |
| 1,245 | |
| 279 |
| 22 | % |
Accretion and non-cash adjustment of closure & post-closure liabilities | |
| 1,267 | |
| 1,133 | |
| 134 |
| 12 | % |
Gain on property insurance recoveries | |
| — | |
| (4,500) | |
| 4,500 |
| (100) | % |
Business development and integration expenses | |
| 2,973 | |
| 2,530 | |
| 443 |
| 18 | % |
Adjusted EBITDA | | $ | 38,699 | | $ | 37,934 | | $ | 765 |
| 2 | % |
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
42
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; |
● | 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; and |
● | Adjusted EBITDA does not reflect our business development and integration expenses. |
Revenue
Total revenue increased 37% to $213.9 million for the second quarter of 2020 compared with $155.8 million for the second quarter of 2019. The acquired NRC operations contributed $70.4 million of total revenue for the second quarter of 2020. Excluding NRC operations, total revenue decreased 8% to $143.5 million for the second quarter of 2020, compared with $155.8 million for the second quarter of 2019.
Environmental Services
Environmental Services segment revenue decreased 2% to $110.4 million for the second quarter of 2020, compared to $112.8 million for the second quarter of 2019. The acquired NRC operations contributed $7.3 million of segment revenue for the second quarter of 2020. Excluding NRC operations, segment revenue decreased 9% to $103.1 million for the second quarter of 2020, compared with $112.8 million for the second quarter of 2019. T&D revenue (excluding NRC) decreased 4% compared to the second quarter of 2019, primarily as a result of a 10% decrease in Base Business revenue and a 12% increase in project-based Event Business revenue. Transportation and logistics service revenue (excluding NRC) decreased 25% compared to the second quarter of 2019, reflecting Event Business projects utilizing less of the Company’s transportation and logistics services. Total tons of waste disposed of or processed across all of our facilities (excluding NRC) decreased 15% for the second quarter of 2020 compared to the second quarter of 2019. Tons of waste disposed of or processed at our landfills (excluding NRC) decreased 14% for the second quarter of 2020 compared to the second quarter of 2019.
T&D revenue (excluding NRC) from recurring Base Business waste generators decreased 10% for the second quarter of 2020 compared to the second quarter of 2019 and comprised 73% of total T&D revenue for the second quarter of 2020. Comparing the second quarter of 2020 to the second quarter of 2019, decreases in Base Business T&D revenue from the metal manufacturing, broker/TSDF, general manufacturing, government and refining industry groups were partially offset by an increase in Base Business T&D revenue from the Other industry group.
T&D revenue (excluding NRC) from Event Business waste generators increased 12% for the second quarter of 2020 compared to the second quarter of 2019 and comprised 27% of total T&D revenue for the second quarter of 2020. Comparing the second quarter of 2020 to the second quarter of 2019, increases in Event Business T&D revenue from the
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utilities and chemical manufacturing industry groups were partially offset by decreases in Event Business T&D revenue from the government, metal manufacturing and refining industry groups.
The following table summarizes combined Base Business and Event Business T&D revenue growth (excluding NRC), within the Environmental Services segment, by generator industry for the second quarter of 2020 as compared to the second quarter of 2019:
| | |
| | Treatment and Disposal Revenue Growth |
| | Three Months Ended June 30, 2020 vs. |
|
| Three Months Ended June 30, 2019 |
Utilities | | 176% |
Chemical Manufacturing | | 10% |
Other | | 6% |
Mining, Exploration & Production | | 6% |
Transportation | | 1% |
Waste Management & Remediation | | -4% |
General Manufacturing |
| -12% |
Broker / TSDF | | -12% |
Refining | | -18% |
Metal Manufacturing | | -25% |
Government | | -30% |
Field & Industrial Services
Field & Industrial Services segment revenue increased 141% to $103.5 million for the second quarter of 2020 compared with $43.0 million for the second quarter of 2019. The acquired NRC operations contributed $63.1 million of segment revenue for the second quarter of 2020. Excluding NRC operations, segment revenue decreased 6% to $40.4 million for the second quarter of 2020, compared with $43.0 million for the second quarter of 2019. The decrease in Field & Industrial Services segment revenue (excluding NRC) is primarily attributable to lower revenues from our Transportation and Logistics and Industrial Services business lines, partially offset by higher revenues from our Emergency Response and Small Quantity Generation business lines.
Gross Profit
Total gross profit increased 9% to $53.8 million for the second quarter of 2020, up from $49.6 million for the second quarter of 2019. Total gross margin was 25% for the second quarter of 2020 compared with 32% for the second quarter of 2019. The acquired NRC operations contributed $7.2 million of total gross profit for the second quarter of 2020. Excluding NRC operations, total gross profit decreased 6% to $46.6 million for the second quarter of 2020, compared with $49.6 million for the second quarter of 2019. Excluding NRC operations, total gross margin was 32% for both the second quarter of 2020 and 2019.
Environmental Services
Environmental Services segment gross profit decreased 7% to $40.2 million for the second quarter of 2020, down from $43.1 million for the second quarter of 2019. Total segment gross margin for the second quarter of 2020 was 36% compared with 38% for the second quarter of 2019. The acquired NRC operations contributed $2.0 million of segment gross loss for the second quarter of 2020. Excluding NRC operations, segment gross profit decreased 2% to $42.2 million for the second quarter of 2020, compared with $43.1 million for the second quarter of 2019. Excluding NRC operations, segment gross margin was 41% for the second quarter of 2020 compared with 38% for the second quarter of 2019. T&D gross margin (excluding NRC) was 45% for both the second quarter of 2020 and 2019.
Field & Industrial Services
Field & Industrial Services segment gross profit increased 109% to $13.6 million for the second quarter of 2020, up from $6.5 million for the second quarter of 2019. Total segment gross margin was 13% for the second quarter of 2020 compared
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with 15% for the second quarter of 2019. The acquired NRC operations contributed $9.2 million of segment gross profit for the second quarter of 2020. Excluding NRC operations, segment gross profit decreased 32% to $4.4 million for the second quarter of 2020, compared with $6.5 million for the second quarter of 2019, reflecting both lower margins and lower revenues. Excluding NRC operations, segment gross margin was 11% for the second quarter of 2020 compared with 15% for the second quarter of 2019, primarily reflecting a less favorable service mix.
Selling, General and Administrative Expenses (“SG&A”)
Total SG&A increased to $48.5 million, or 23% of total revenue, for the second quarter of 2020, up from $24.0 million, or 15% of total revenue, for the second quarter of 2019. The acquired NRC operations contributed $19.5 million of SG&A for the second quarter of 2020. Excluding NRC operations, total SG&A increased to $29.0 million, or 20% of total revenue, for the second quarter of 2020 compared with $24.0 million, or 15% of total revenue, for the second quarter of 2019.
Environmental Services
Environmental Services segment SG&A increased 572% to $13.5 million, or 12% of segment revenue, for the second quarter of 2020 compared with $2.0 million, or 2% of segment revenue, for the second quarter of 2019. The acquired NRC operations contributed $6.4 million of segment SG&A for the second quarter of 2020. Excluding NRC operations, segment SG&A increased to $7.1 million, or 7% of segment revenue, for the second quarter of 2020 compared with $2.0 million, or 2% of segment revenue, for the second quarter of 2019. The increase in Environmental Services segment SG&A (excluding NRC) is primarily attributable to property insurance recoveries of $4.5 million recognized in the second quarter of 2019 related to the incident at our Grand View, Idaho facility in the fourth quarter of 2018 and higher insurance costs in the second quarter of 2020 compared to the second quarter of 2019.
Field & Industrial Services
Field & Industrial Services segment SG&A increased 251% to $13.1 million, or 13% of segment revenue, for the second quarter of 2020 compared with $3.7 million, or 9% of segment revenue, for the second quarter of 2019. The acquired NRC operations contributed $9.1 million of segment SG&A for the second quarter of 2020. Excluding NRC operations, segment SG&A increased to $4.0 million, or 10% of segment revenue, for the second quarter of 2020 compared with $3.7 million, or 9% of segment revenue, for the second quarter of 2019. The increase in Field & Industrial Services segment SG&A (excluding NRC) primarily reflects higher intangible asset amortization expense and higher labor costs, partially offset by lower bad debt expenses in the second quarter of 2020 compared to the second quarter of 2019.
Corporate
Corporate SG&A increased to $21.9 million, or 10% of total revenue, for the second quarter of 2020 compared with $18.3 million, or 12% of total revenue, for the second quarter of 2019. The acquired NRC operations contributed $4.0 million of Corporate SG&A for the second quarter of 2020. Excluding NRC operations, Corporate SG&A decreased to $17.9 million, or 12% of total revenue, for the second quarter of 2020 compared with $18.3 million, or 12% of total revenue, for the second quarter of 2019. The decrease in Corporate SG&A (excluding NRC) primarily reflects lower business development and integration expenses related to the NRC Merger and lower travel-related expenses, partially offset by higher employee labor and benefits costs, higher professional services expenses, higher information technology related expenses and higher safety supplies expenses in the second quarter of 2020 compared to the second quarter of 2019.
Components of Adjusted EBITDA
Income tax expense
The Company’s consolidated effective income tax rate for the second quarter of 2020 was (77.4)%, down from 29.2% in the second quarter of 2019. The decrease was due to income tax expense on foreign earnings in the second quarter of 2020 partially offset by income tax benefit on domestic earnings in the second quarter of 2020.
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Interest expense
Interest expense was $7.9 million for the second quarter of 2020 compared with $3.6 million for the second quarter of 2019. The increase is the result of higher outstanding debt levels primarily attributable to our new $450.0 million Term Loan used to refinance the indebtedness of NRC and pay transaction expenses incurred in connection with the NRC Merger in the fourth quarter of 2019, as well as higher borrowings on our Revolving Credit Facility primarily used to fund share repurchases in the first quarter of 2020, partially offset by the impact of lower interest rates in the second quarter of 2020 compared to the second quarter of 2019.
Foreign currency loss
We recognized a $671,000 foreign currency loss for the second quarter of 2020 compared with a $384,000 foreign currency loss for the second quarter of 2019. Foreign currency gains and losses reflect changes in business activity conducted in a currency other than the USD, our functional currency. Additionally, we established intercompany loans with certain of our Canadian subsidiaries, whose functional currency is the Canadian dollar (“CAD”) 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 June 30, 2020, we had $30.5 million of intercompany loans subject to currency revaluation.
Other income
Other income was $125,000 for the second quarter of 2020 compared with other income of $122,000 for the second quarter of 2019.
Depreciation and amortization of plant and equipment
Depreciation and amortization expense increased 102% to $18.4 million for the second quarter of 2020 compared with $9.1 million for the second quarter of 2019. The acquired NRC operations contributed $9.0 million of depreciation and amortization expense for the second quarter of 2020. Excluding NRC operations, depreciation and amortization expense was $9.4 million for the second quarter of 2020 compared with $9.1 million for the second quarter of 2019, primarily reflecting incremental depreciation expense on plant and equipment assets placed in service subsequent to the second quarter of 2019.
Amortization of intangible assets
Intangible assets amortization expense increased 221% to $9.2 million for the second quarter of 2020 compared with $2.9 million for the second quarter of 2019. The acquired NRC operations contributed $6.2 million of intangible assets amortization expense for the second quarter of 2020. Excluding NRC operations, intangible assets amortization expense was $3.0 million for the second quarter of 2020 compared with $2.9 million for the second quarter of 2019, primarily reflecting additional amortization of intangible assets recorded as a result of US Ecology Sarnia and Impact Environmental Services, Inc. acquisitions.
Share-based compensation
Share-based compensation expense increased 22% to $1.5 million for the second quarter of 2020, compared with $1.2 million for the second quarter of 2019, primarily reflecting incremental share-based compensation associated with replacement restricted stock units issued in connection with the NRC Merger.
Accretion and non-cash adjustment of closure and post-closure liabilities
Accretion and non-cash adjustment of closure and post-closure liabilities increased 12% to $1.3 million for the second quarter of 2020, compared with $1.1 million for the second quarter of 2019.
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Gain on property insurance recoveries
The Company recognized gains on property-related insurance recoveries of $4.5 million in the second quarter of 2019 related to the incident at our Grand View, Idaho facility in the fourth quarter of 2018.
Business development and integration expenses
Business development and integration expenses increased 18% to $3.0 million in the second quarter of 2020, compared to $2.5 million in the second quarter of 2019, primarily attributable to post-NRC Merger integration expenses incurred in the second quarter of 2020.
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SIX MONTHS ENDED JUNE 30, 2020 COMPARED TO SIX MONTHS ENDED JUNE 30, 2019
Operating results and percentage of revenues were as follows:
| | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, | | 2020 vs. 2019 | | |||||||||||
$s in thousands |
| 2020 |
| % |
| 2019 |
| % |
| $ Change |
| % Change |
| |||
Revenue |
| |
|
|
|
| |
|
|
|
| |
|
|
|
|
Environmental Services | | $ | 237,154 |
| 52 | % | $ | 205,177 |
| 72 | % | $ | 31,977 |
| 16 | % |
Field & Industrial Services | |
| 217,484 |
| 48 | % |
| 81,662 |
| 28 | % |
| 135,822 |
| 166 | % |
Total | | $ | 454,638 |
| 100 | % | $ | 286,839 |
| 100 | % | $ | 167,799 |
| 58 | % |
Gross Profit | |
|
|
|
| |
|
|
|
| |
|
|
|
| |
Environmental Services | | $ | 84,312 |
| 36 | % | $ | 74,637 |
| 36 | % | $ | 9,675 |
| 13 | % |
Field & Industrial Services | |
| 30,621 |
| 14 | % |
| 10,187 |
| 12 | % |
| 20,434 |
| 201 | % |
Total | | $ | 114,933 |
| 25 | % | $ | 84,824 |
| 30 | % | $ | 30,109 |
| 35 | % |
Selling, General & Administrative Expenses | |
|
|
|
| |
| |
|
| |
|
|
|
| |
Environmental Services | | $ | 27,740 |
| 12 | % | $ | 3,415 |
| 2 | % | $ | 24,325 |
| 712 | % |
Field & Industrial Services | |
| 27,800 |
| 13 | % |
| 7,123 |
| 9 | % |
| 20,677 |
| 290 | % |
Corporate | |
| 44,005 |
| n/m | |
| 33,816 |
| n/m | |
| 10,189 |
| 30 | % |
Total | | $ | 99,545 |
| 22 | % | $ | 44,354 |
| 15 | % | $ | 55,191 |
| 124 | % |
Adjusted EBITDA | |
|
|
|
| |
|
|
|
| |
|
|
|
| |
Environmental Services | | $ | 89,539 |
| 38 | % | $ | 82,316 |
| 40 | % | $ | 7,223 |
| 9 | % |
Field & Industrial Services | |
| 27,742 |
| 13 | % |
| 7,576 |
| 9 | % |
| 20,166 |
| 266 | % |
Corporate | |
| (35,362) |
| n/m | |
| (28,226) |
| n/m | |
| (7,136) |
| 25 | % |
Total | | $ | 81,919 |
| 18 | % | $ | 61,666 |
| 21 | % | $ | 20,253 |
| 33 | % |
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 impairment charges, gain on property insurance recoveries, business development and integration expenses and other income/expense. In 2019, we updated our Adjusted EBITDA definition to include adjustments for business development and integration expenses and gain on property insurance recoveries. Throughout this Quarterly Report on Form 10-Q, our Adjusted EBITDA results for all periods presented have been recast to reflect these adjustments. The reconciliation of Net income to Adjusted EBITDA is as follows:
| | | | | | | | | | | | |
| | Six Months Ended June 30, | | 2020 vs. 2019 | | |||||||
$s in thousands |
| 2020 |
| 2019 |
| $ Change |
| % Change |
| |||
Net (loss) income | | $ | (303,269) | | $ | 23,534 | | $ | (326,803) |
| (1,389) | % |
Income tax expense | |
| 1,998 | |
| 9,436 | |
| (7,438) |
| (79) | % |
Interest expense | |
| 17,163 | |
| 7,618 | |
| 9,545 |
| 125 | % |
Interest income | |
| (242) | |
| (409) | |
| 167 |
| (41) | % |
Foreign currency (gain) loss | |
| (266) | |
| 523 | |
| (789) |
| (151) | % |
Other income | |
| (296) | |
| (232) | |
| (64) |
| 28 | % |
Property and equipment impairment charges | |
| — | |
| 25 | |
| (25) |
| (100) | % |
Goodwill impairment charges | | | 300,300 | | | — | | | 300,300 | | n/m | |
Depreciation and amortization of plant and equipment | |
| 36,396 | |
| 17,254 | |
| 19,142 |
| 111 | % |
Amortization of intangible assets | |
| 18,634 | |
| 5,674 | |
| 12,960 |
| 228 | % |
Share-based compensation | |
| 3,088 | |
| 2,467 | |
| 621 |
| 25 | % |
Accretion and non-cash adjustment of closure & post-closure liabilities | | | 2,533 | | | 2,258 | | | 275 | | 12 | % |
Gain on property insurance recoveries | |
| — | |
| (9,153) | |
| 9,153 |
| (100) | % |
Business development and integration expenses | |
| 5,880 | |
| 2,671 | |
| 3,209 |
| 120 | % |
Adjusted EBITDA | | $ | 81,919 | | $ | 61,666 | | $ | 20,253 |
| 33 | % |
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
48
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; |
● | 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; and |
● | Adjusted EBITDA does not reflect our business development and integration expenses. |
Revenue
Total revenue increased 58% to $454.6 million for the first six months of 2020 compared with $286.8 million for the first six months of 2019. The acquired NRC operations contributed $157.0 million of total revenue for the first six months of 2020. Excluding NRC operations, total revenue increased 4% to $297.6 million for the first six months of 2020, compared with $286.8 million for the first six months of 2019.
Environmental Services
Environmental Services segment revenue increased 16% to $237.2 million for the first six months of 2020, compared to $205.2 million for the first six months of 2019. The acquired NRC operations contributed $24.1 million of segment revenue for the first six months of 2020. Excluding NRC operations, segment revenue increased 4% to $213.1 million for the first six months of 2020, compared with $205.2 million for the first six months of 2019. T&D revenue (excluding NRC) increased 6% compared to the first six months of 2019, primarily as a result of a 3% decrease in Base Business revenue and a 44% increase in project-based Event Business revenue. Transportation and logistics service revenue (excluding NRC) decreased 3% compared to the first six months of 2019, reflecting Event Business projects utilizing less of the Company’s transportation and logistics services. Total tons of waste disposed of or processed across all of our facilities (excluding NRC) decreased 1% for the first six months of 2020 compared to the first six months of 2019. Tons of waste disposed of or processed at our landfills (excluding NRC) increased 2% for the first six months of 2020 compared to the first six months of 2019.
T&D revenue (excluding NRC) from recurring Base Business waste generators decreased 3% for the first six months of 2020 compared to the first six months of 2019 and comprised 74% of total T&D revenue for the first six months of 2020. Comparing the first six months of 2020 to the first six months of 2019, decreases in Base Business T&D revenue from the refining, metal manufacturing, government and broker/TSDF industry groups were partially offset by an increase in Base Business T&D revenue from the Other industry group.
T&D revenue (excluding NRC) from Event Business waste generators increased 44% for the first six months of 2020 compared to the first six months of 2019 and comprised 26% of total T&D revenue for the first six months of 2020. Comparing the first six months of 2020 to the first six months of 2019, increases in Event Business T&D revenue from
49
the chemical manufacturing, utilities, transportation and waste management & remediation industry groups were partially offset by a decrease in Event Business T&D revenue from the refining industry group.
The following table summarizes combined Base Business and Event Business T&D revenue growth (excluding NRC), within the Environmental Services segment, by generator industry for the first six months of 2020 as compared to the first six months of 2019:
| | |
| | Treatment and Disposal Revenue Growth |
| | Six Months Ended June 30, 2020 vs. |
|
| Six Months Ended June 30, 2019 |
Utilities | | 89% |
Waste Management & Remediation | | 68% |
Transportation | | 38% |
Chemical Manufacturing | | 26% |
Other | | 7% |
General Manufacturing |
| 2% |
Broker / TSDF | | -3% |
Metal Manufacturing | | -4% |
Mining, Exploration & Production | | -8% |
Government | | -11% |
Refining | | -22% |
Field & Industrial Services
Field & Industrial Services segment revenue increased 166% to $217.5 million for the first six months of 2020 compared with $81.7 million for the first six months of 2019. The acquired NRC operations contributed $132.9 million of segment revenue for the first six months of 2020. Excluding NRC operations, segment revenue increased 4% to $84.6 million for the first six months of 2020, compared with $81.7 million for the first six months of 2019. The increase in Field & Industrial Services segment revenue (excluding NRC) is primarily attributable to higher revenues from our Small Quantity Generation, Remediation and Emergency Response business lines, partially offset by lower revenues from our Transportation and Logistics and Industrial Services business lines.
Gross Profit
Total gross profit increased 35% to $114.9 million for the first six months of 2020, up from $84.8 million for the first six months of 2019. Total gross margin was 25% for the first six months of 2020 compared with 30% for the first six months of 2019. The acquired NRC operations contributed $23.6 million of total gross profit for the first six months of 2020. Excluding NRC operations, total gross profit increased 8% to $91.3 million for the first six months of 2020, compared with $84.8 million for the first six months of 2019. Excluding NRC operations, total gross margin was 31% for the first six months of 2020 compared with 30% for the first six months of 2019.
Environmental Services
Environmental Services segment gross profit increased 13% to $84.3 million for the first six months of 2020, up from $74.6 million for the first six months of 2019. Total segment gross margin for both the first six months of 2020 and 2019 was 36%. The acquired NRC operations contributed $2.7 million of segment gross profit for the first six months of 2020. Excluding NRC operations, segment gross profit increased 9% to $81.6 million for the first six months of 2020, compared with $74.6 million for the first six months of 2019. Excluding NRC operations, segment gross margin was 38% for the first six months of 2020 compared with 36% for the first six months of 2019. T&D gross margin (excluding NRC) was 44% for the first six months of 2020 compared with 42% for the first six months of 2019, primarily reflecting higher revenues and a more favorable service mix.
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Field & Industrial Services
Field & Industrial Services segment gross profit increased 201% to $30.6 million for the first six months of 2020, up from $10.2 million for the first six months of 2019. Total segment gross margin was 14% for the first six months of 2020 compared with 12% for the first six months of 2019. The acquired NRC operations contributed $20.9 million of segment gross profit for the first six months of 2020. Excluding NRC operations, segment gross profit decreased 5% to $9.7 million for the first six months of 2020, compared with $10.2 million for the first six months of 2019. Excluding NRC operations, segment gross margin was 11% for the first six months of 2020 compared with 12% for the first six months of 2019, primarily reflecting a less favorable service mix, partially offset by higher revenues.
Selling, General and Administrative Expenses (“SG&A”)
Total SG&A increased to $99.5 million, or 22% of total revenue, for the first six months of 2020, up from $44.4 million, or 15% of total revenue, for the first six months of 2019. The acquired NRC operations contributed $39.7 million of SG&A for the first six months of 2020. Excluding NRC operations, total SG&A increased to $59.8 million, or 20% of total revenue, for the first six months of 2020 compared with $44.4 million, or 15% of total revenue, for the first six months of 2019.
Environmental Services
Environmental Services segment SG&A increased 712% to $27.7 million, or 12% of segment revenue, for the first six months of 2020 compared with $3.4 million, or 2% of segment revenue, for the first six months of 2019. The acquired NRC operations contributed $13.0 million of segment SG&A for the first six months of 2020. Excluding NRC operations, segment SG&A increased to $14.7 million, or 7% of segment revenue, for the first six months of 2020 compared with $3.4 million, or 2% of segment revenue, for the first six months of 2019. The increase in Environmental Services segment SG&A (excluding NRC) is primarily attributable to property insurance recoveries of $9.2 million recognized in the first six months of 2019 related to the incident at our Grand View, Idaho facility in the fourth quarter of 2018, higher insurance costs and lower bad debt recoveries in the first six months of 2020 compared to the first six months of 2019.
Field & Industrial Services
Field & Industrial Services segment SG&A increased 290% to $27.8 million, or 13% of segment revenue, for the first six months of 2020 compared with $7.1 million, or 9% of segment revenue, for the first six months of 2019. The acquired NRC operations contributed $19.7 million of segment SG&A for the first six months of 2020. Excluding NRC operations, segment SG&A increased to $8.1 million, or 10% of segment revenue, for the first six months of 2020 compared with $7.1 million, or 9% of segment revenue, for the first six months of 2019. The increase in Field & Industrial Services segment SG&A (excluding NRC) primarily reflects higher labor costs, higher intangible asset amortization expense and lower gains on disposals of assets in the first six months of 2020 compared to the first six months of 2019.
Corporate
Corporate SG&A increased to $44.0 million, or 10% of total revenue, for the first six months of 2020 compared with $33.8 million, or 12% of total revenue, for the first six months of 2019. The acquired NRC operations contributed $7.0 million of Corporate SG&A for the first six months of 2020. Excluding NRC operations, Corporate SG&A increased to $37.0 million, or 12% of total revenue, for the first six months of 2020 compared with $33.8 million, or 12% of total revenue, for the first six months of 2019. The increase in Corporate SG&A (excluding NRC) primarily reflects higher employee labor and benefits costs, higher business development and integration expenses related to the NRC Merger and higher information technology related expenses, partially offset by lower travel-related expenses in the first six months of 2020 compared to the first six months of 2019.
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Components of Adjusted EBITDA
Income tax expense
Our effective income tax rate for the first six months of 2020 was (0.7)%, compared with 28.6% for the first six months of 2019. This decrease was primarily due to non-deductible goodwill impairment charges as well income tax expense on foreign earnings in the first six months of 2020, partially offset by income tax benefit on domestic earnings in the first six months of 2020.
Interest expense
Interest expense was $17.2 million for the first six months of 2020 compared with $7.6 million for the first six months of 2019. The increase is the result of higher outstanding debt levels primarily attributable to our new $450.0 million Term Loan used to refinance the indebtedness of NRC and pay transaction expenses incurred in connection with the NRC Merger in the fourth quarter of 2019, as well as higher borrowings on our Revolving Credit Facility primarily used to fund share repurchases in the first quarter of 2020, partially offset by the impact of lower interest rates in the first six months of 2020 compared to the first six months of 2019.
Foreign currency gain (loss)
We recognized a $266,000 foreign currency gain for the first six months of 2020 compared with a $523,000 foreign currency loss for the first six months of 2019. Foreign currency gains and losses reflect changes in business activity conducted in a currency other than the USD, our functional currency. Additionally, we established intercompany loans with certain of our Canadian subsidiaries, whose functional currency is the Canadian dollar (“CAD”) 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 June 30, 2020, we had $30.5 million of intercompany loans subject to currency revaluation.
Other income
Other income was $296,000 for the first six months of 2020 compared with other income of $232,000 for the first six months of 2019.
Goodwill impairment charges
As previously discussed, in the first quarter of 2020 we performed an interim assessment of the fair value of certain reporting units as of March 31, 2020. Based on the results of the assessment, we recognized goodwill impairment charges of $300.3 million during the first six months of 2020.
Depreciation and amortization of plant and equipment
Depreciation and amortization expense increased 111% to $36.4 million for the first six months of 2020 compared with $17.3 million for the first six months of 2019. The acquired NRC operations contributed $17.7 million of depreciation and amortization expense for the first six months of 2020. Excluding NRC operations, depreciation and amortization expense was $18.7 million for the first six months of 2020 compared with $17.3 million for the first six months of 2019, primarily reflecting incremental depreciation expense on plant and equipment assets placed in service subsequent to the first six months of 2019.
Amortization of intangible assets
Intangible assets amortization expense increased 228% to $18.6 million for the first six months of 2020 compared with $5.7 million for the first six months of 2019. The acquired NRC operations contributed $12.6 million of intangible assets amortization expense for the first six months of 2020. Excluding NRC operations, intangible assets amortization expense
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was $6.0 million for the first six months of 2020 compared with $5.7 million for the first six months of 2019, primarily reflecting additional amortization of intangible assets recorded as a result of US Ecology Sarnia and Impact Environmental Services, Inc. acquisitions.
Share-based compensation
Share-based compensation expense increased 25% to $3.1 million for the first six months of 2020, compared with $2.5 million for the first six months of 2019, primarily reflecting incremental share-based compensation associated with replacement restricted stock units issued in connection with the NRC Merger.
Accretion and non-cash adjustment of closure and post-closure liabilities
Accretion and non-cash adjustment of closure and post-closure liabilities increased 12% to $2.5 million for the first six months of 2020, compared with $2.3 million for the first six months of 2019.
Gain on property insurance recoveries
The Company recognized gains on property-related insurance recoveries of $9.2 million in the first six months of 2019 related to the incident at our Grand View, Idaho facility in the fourth quarter of 2018.
Business development and integration expenses
Business development and integration expenses increased 120% to $5.9 million in the first six months of 2020, compared to $2.7 million in the first six months of 2019, primarily attributable to post-NRC Merger integration expenses incurred in the first six months of 2020.
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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, 2019.
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
We are continually evaluating the impact of the COVID-19 pandemic on our financial condition and liquidity. Although the situation is fluid and highly uncertain, we have analyzed a wide range of economic scenarios and the impact on our ability to generate cash. These analyses inform our liquidity plans and activities. On March 31, 2020, for example, the Company announced certain cost-saving measures including, but not limited to, cost control initiatives, expected to generate between $15 million to $20 million of annual savings; a reduction to planned 2020 capital spending of approximately 30%, expected to save up to $30 million in cash; and suspension of the Company’s quarterly dividend, commencing with the second quarter of 2020, to preserve free cash flow and enhance liquidity. We also plan to take advantage of the provision of the Coronavirus Aid, Relief and Economic Security Act, which was signed into law on March 27, 2020, allowing for the deferral of the payment of the employer portion of payroll tax withholdings, which is expected to yield up to $8 million of additional cash savings in 2020. We are committed to protecting our workforce, managing through lower business activity by redeploying team members to other business lines, reducing hours and taking advantage of furlough programs that enable the Company to better align personnel costs with customer activity levels.
Our primary sources of liquidity are cash and cash equivalents, cash generated from operations and borrowings under the Credit Agreement. At June 30, 2020, we had $122.5 million in unrestricted cash and cash equivalents immediately available and $68.8 million of borrowing capacity available under our Revolving Credit Facility. We assess our liquidity in terms of our ability to generate cash to fund our operating, investing and financing activities. Our primary ongoing cash requirements are funding operations, capital expenditures, paying principal and 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, and that the cost-saving measures described above have strengthened our ability to withstand the adverse impact of the COVID-19 pandemic. Furthermore, existing cash balances and availability of additional borrowings under the Credit Agreement provide additional sources of liquidity should they be required. On June 26, 2020, Predecessor US Ecology amended the Credit Agreement, which provides for a covenant relief period through the earlier of March 31, 2022 and the date the Predecessor US Ecology elects to end such covenant relief period pursuant to the terms therein. See additional information on the Third Amendment under “Amendments to the Credit Agreement,” below.
Operating Activities
For the six months ended June 30, 2020, net cash provided by operating activities was $59.5 million. This primarily reflects net loss of $303.3 million, non-cash goodwill impairment charges of $300.3 million, non-cash depreciation, amortization and accretion of $57.6 million and a decrease in accounts receivable of $43.6 million, partially offset by a decrease in accounts payable and accrued liabilities of $32.2 million, a decrease in accrued salaries and benefits of $6.5 million and an increase in other assets of $5.2 million. Impacts on net income are due to the factors discussed above under “Results of Operations.” Changes in accounts receivable and accounts payable and accrued liabilities are attributable to the timing of payments from customers and payments to vendors for products and services. The decrease in accrued salaries and benefits is primarily attributable to the payment of accrued employee-incentive compensation related to fiscal 2019 financial performance.
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We calculate days sales outstanding (“DSO”) as a rolling four quarter average of our net accounts receivable divided by our quarterly revenue. Our net accounts receivable balance for the DSO calculation includes trade accounts receivable, net of allowance for doubtful accounts, and unbilled accounts receivable, adjusted for changes in deferred revenue. DSO was 85 days as of June 30, 2020, compared to 84 days as of December 31, 2019 and 80 days as of June 30, 2019.
For the six months ended June 30, 2019, net cash provided by operating activities was $38.9 million. This primarily reflects net income of $23.5 million, non-cash depreciation, amortization and accretion of $25.2 million, deferred incomes taxes of $3.7 million, share-based compensation of $2.5 million, and an increase in deferred revenue of $2.4 million, partially offset by a $9.2 million gain on insurance proceeds from damaged property and equipment, an increase in accounts receivable of $5.3 million, a decrease in accrued salaries and benefits of $2.0 million and an increase in other assets of $1.4 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. The increase in deferred revenue is primarily attributable to cash payments that are received, or advance billings charged, prior to performance of services and waste that has been received but not yet treated or disposed at the end of the period. We recognized property-related insurance recoveries in the first six months of 2019 related to the incident at our Grand View, Idaho facility in the fourth quarter of 2018. The increase in receivables is primarily attributable to the timing of customer payments. The decrease in accrued salaries and benefits is primarily attributable to cash payments during the first six months of 2019 for accrued 2018 incentive compensation.
Investing Activities
For the six months ended June 30, 2020, net cash used in investing activities was $38.6 million, primarily related to capital expenditures of $36.0 million and the acquisition of Impact Environmental, Inc. for $3.3 million in January 2020. Capital projects consisted primarily of equipment purchases and infrastructure upgrades at our corporate and operating facilities.
For the six months ended June 30, 2019, net cash used in investing activities was $14.7 million, primarily related to capital expenditures of $24.7 million, partially offset by property insurance proceeds of $9.5 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 Blainville, Quebec, Canada and our Robstown, Texas facilities as well as equipment purchases and infrastructure upgrades at our corporate and operating facilities.
Financing Activities
For the six months ended June 30, 2020, net cash provided by financing activities was $61.6 million, consisting primarily of $90.0 million in borrowings on our revolving credit facility, partially offset by repurchases of our common stock of $18.3 million and dividend payments to our stockholders of $5.7 million. Quarterly cash dividends have been suspended and no dividends were paid in the second quarter of 2020.
For the six months ended June 30, 2019, net cash used in financing activities was $39.3 million, consisting primarily of $30.0 million in payments on our revolving credit facility and dividend payments to our stockholders of $7.9 million.
Credit Agreement
On April 18, 2017, Predecessor US Ecology, a wholly-owned subsidiary of the Company, entered into a new senior secured credit agreement (as amended, restated, supplemented or otherwise modified through the date hereof, the “Credit Agreement”) with 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 $40.0 million sublimit for the issuance of swingline loans used to fund short-term working capital requirements. The 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 Credit Agreement was amended in November 2019 in connection with the NRC Merger and further amended on June 26, 2020 pursuant to the Third Amendment (as defined below).
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During the six months ended June 30, 2020, the effective interest rate on the Revolving Credit Facility, after giving effect to the impact of our interest rate swap and the amortization of the loan discount and debt issuance costs, was 3.70%. Interest only payments are due either quarterly or on the last day of any interest period, as applicable. In March 2020, the Company entered into an interest rate swap agreement, effectively fixing the interest rate on $500.0 million, or approximately 58%, of the Revolving Credit Facility and term loan borrowings outstanding as of June 30, 2020.
Except as modified by the Third Amendment as described below, 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 Credit Agreement). The maximum letter of credit capacity under the Revolving Credit Facility is $75.0 million and the Credit Agreement provides for a letter of credit fee equal to the applicable margin for LIBOR loans under the Revolving Credit Facility. At June 30, 2020, there were $417.0 million of revolving credit loans outstanding on the Revolving Credit Facility. These revolving credit loans are due upon the earliest to occur of (i) November 1, 2024 (or, with respect to any lender, such later date as requested by us and accepted by such lender), (ii) the date of termination of the entire revolving credit commitment (as defined in the Credit Agreement) by us, and (iii) 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 $40.0 million swingline loan sublimit under the Revolving Credit Facility. Predecessor US Ecology’s revolving credit loans outstanding under the Revolving Credit Facility are not subject to repayment through the Sweep Arrangement. As of June 30, 2020, there were $4.0 million in borrowings outstanding subject to the Sweep Arrangement.
As of June 30, 2020, the availability under the Revolving Credit Facility was $68.8 million with $10.2 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.
Amendments to the Credit Agreement
On August 6, 2019, Predecessor US Ecology entered into the first amendment (the “First Amendment”) to the 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 the indebtedness of NRC and pay related transaction expenses in connection with the NRC Merger, modified the accordion feature allowing Predecessor US Ecology 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 Credit Agreement. Effective November 1, 2019, the Second Amendment, among other things, amended the 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 NRC in connection with the NRC Merger, to pay certain fees, costs and expenses incurred in connection with the NRC Merger 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). During the six months ended June 30, 2020, the effective interest rate on the term loan, including the impact of the amortization of debt issuance costs, was 3.82%.
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On June 26, 2020, Predecessor US Ecology entered into the third amendment (the “Third Amendment”) to the Credit Agreement. Among other things, the Third Amendment amended the Credit Agreement to provide a covenant relief period through the earlier of March 31, 2022 and the date the Predecessor US Ecology elects to end such covenant relief period pursuant to the terms therein. During the covenant relief period, the Third Amendment increased Predecessor US Ecology’s consolidated total net leverage ratio requirement as of the end of each fiscal quarter to certain ratios above the 4.00 to 1.00 ratio in effect immediately before giving effect to the Third Amendment, subject to compliance with certain restrictions on restricted payments and permitted acquisitions during such covenant relief period. Furthermore, during the covenant relief period, revolving credit loans are available based on a base rate (as defined in the Credit Agreement) or the LIBOR, at the Company’s option, plus an applicable margin.
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.
CONTRACTUAL OBLIGATIONS AND GUARANTEES
In March 2020, the Company entered into an interest rate swap agreement with Wells Fargo, effectively fixing the interest rate on $500.0 million, or approximately 58%, of the Revolving Credit Facility and term loan borrowings outstanding as of June 30, 2020. In connection with our entry into the March 2020 interest rate swap, we terminated our existing interest rate swap prior to its scheduled maturity date of June 2021. For more 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.
Except as set forth above, there were no material changes in the amounts of our contractual obligations and guarantees during the six months ended June 30, 2020. 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, 2019.
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 June 30, 2020, $59.5 million of cash equivalents was invested in money market accounts and $5.2 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 Revolving Credit Facility and Term Loan borrowings under the Credit Agreement. Our Revolving Credit Facility borrowings incur interest at a base rate (as defined in the Credit Agreement) or LIBOR, at the Company’s option, plus an applicable margin which is determined according to a pricing grid under which the interest rate decreases or increases based on our ratio of funded debt to consolidated earnings before interest, taxes, depreciation and amortization (as defined in the Credit Agreement). Our Term Loan 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).
On March 6, 2020, 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 0.832% and receives interest at the variable one-month LIBOR rate on an initial notional amount of $500.0 million.
As of June 30, 2020, there were $417.0 million of Revolving Credit Facility loans, and $447.8 million of Term Loans outstanding under the 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 March 31, 2020 effective date of our interest rate swap we are subject to higher interest payments on only the unhedged borrowings under the Credit Agreement and the Term Loan.
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Based on the outstanding indebtedness under the Credit Agreement at June 30, 2020 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 $1.4 million for the corresponding period.
Foreign Currency Risk
We are subject to foreign currency exchange risk through our international operations. While we operate primarily in the United States and, accordingly, most of our consolidated revenue and associated expenses are denominated in USD. During the six months ended June 30, 2020, we recorded approximately $37.1 million, or 8%, of our revenue in Canada, $9.2 million, or 2%, of our revenue in the EMEA region, and less than 1% of our revenue from other international regions. Revenue and expenses denominated in foreign currencies may be affected by movements in foreign currency exchange rates.
Our exposure to foreign currency exchange risk in our Consolidated Balance Sheets relates primarily to cash, trade payables and receivables, and intercompany loans that are denominated in foreign currencies, primarily CAD. Contracts for services that our foreign subsidiaries provide to customers are often denominated in currencies other than their local functional currency. The resulting cash, receivable and payable accounts are subject to non-cash foreign currency translation gains or losses.
We established intercompany loans with certain of our Canadian subsidiaries, 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 June 30, 2020, we had $30.5 million of intercompany loans outstanding between our Canadian subsidiaries and US Ecology. During the six months ended June 30, 2020, the CAD weakened as compared to the USD resulting in a $1.3 million non-cash foreign currency translation loss being recognized in the Company’s consolidated statements of operations related to the intercompany loans. Based on intercompany balances as of June 30, 2020, a $0.01 CAD increase or decrease in currency rate compared to the USD at June 30, 2020 would have generated a gain or loss of approximately $305,000 for the six months ended June 30, 2020.
We had a total pre-tax foreign currency gain of $266,000 for the six months ended June 30, 2020. We currently have no foreign exchange contracts, option contracts or other foreign currency hedging arrangements. Management evaluates our risk position on an ongoing basis to determine whether foreign exchange hedging strategies should be employed.
Commodity Price Risk
We have exposure to commodity pricing for oil and gas. Fluctuations in oil and gas commodity prices may impact business activity in the industries that we serve, affecting demand for our services and our future earnings and cash flows. We have not entered into any derivative contracts to hedge our exposure to commodity price risk.
ITEM 4. CONTROLS AND PROCEDURES
Management of the Company, including the Chief Executive Officer and the Chief Financial Officer of the Company, have evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of June 30, 2020. 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.
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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 not assessed NRC’s, US Ecology Sarnia’s, or Impact Environmental, Inc.’s internal control over financial reporting as of June 30, 2020. NRC’s financial statements constitute approximately 18% of total assets (excluding goodwill and intangible assets), 36% of revenues and $16.0 million of operating loss (excluding goodwill impairment charges) of the consolidated financial statements of the Company as of and for the six months ended June 30, 2020. US Ecology Sarnia and Impact Environmental, Inc. together constitute less than 1% of totals assets and revenues of the Company on a consolidated basis as of and for the six months ended June 30, 2020.
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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 the Company’s 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 may include developments related to the corona virus disease 2019 (“COVID-19”) pandemic, including, but not limited to, the duration and severity of additional measures taken by government authorities and the private sector to limit the spread of COVID-19, the integration of the operations of NRC Group Holdings Corp. (“NRC”), the loss or failure to renew significant contracts, competition in our markets, adverse economic conditions, our compliance with applicable laws and regulations, potential liability in connection with providing oil spill response services and waste disposal services, the effect of existing or future laws and regulations related to greenhouse gases and climate change, the effect of our failure to comply with U.S. or foreign anti-bribery laws, the effect of compliance with laws and regulations, an accident at one of our facilities, incidents arising out of the handling of dangerous substances, our failure to maintain an acceptable safety record, 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, the effect of changes in the method of determining LIBOR or the replacement thereto, risks associated with our international operations, the impact of changes to U.S. tariff and import and export regulations, fluctuations in commodity markets related to our business, a change in NRC’s classification as an Oil Spill Removal Organization, cyber security threats, unanticipated changes in tax rules and regulations, the loss of key personnel, a deterioration in our labor relations or labor disputes, our reliance on third-party contractors to provide emergency response services, 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 access to cost-effective transportation services, lawsuits, our implementation of new technologies, fluctuations in foreign currency markets and foreign affairs, our integration of acquired businesses, our ability to pay dividends or repurchase stock, anti-takeover regulations, stock market volatility, the failure of the warrants to be in the money or their expiration worthless and risks related to our compliance with maritime regulations (including the Jones Act).
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, 2019, “Item 1A. Risk Factors” in the Company’s Quarterly Report on Form 10-Q for the three months ended March 31, 2020 and in other reports we file with the SEC could harm our business, prospects, operating results, and financial condition.
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Investors should also be aware that while we do, from time to time, communicate with securities analysts, it is against our policy to disclose to them any material non-public information or other confidential commercial information. Accordingly, stockholders should not assume that we agree with any statement or report issued by any analyst irrespective of the content of the statement or report. Furthermore, we have a policy against issuing or confirming financial forecasts or projections issued by others. Thus, to the extent that reports issued by securities analysts contain any projections, forecasts or opinions, such reports are not the responsibility of US Ecology, Inc.
ITEM 1. LEGAL PROCEEDINGS
In December 2010, National Response Corporation, a subsidiary of NRC acquired by the Company in the NRC Merger, was named as one of many “Dispersant Defendants” in multi-district litigation, arising out of the explosion of the BP Deepwater Horizon (“BP”) oil rig, filed in the U.S. District Court for the Eastern District of Louisiana (“In re Deepwater Horizon” or the “MDL”). The claims against National Response Corporation, and other “Dispersant Defendants,” were brought by workers and others who alleged injury arising from post-explosion clean–up efforts, including particularly the use of certain chemical dispersants. In January 2013, the Court approved a Medical Benefits Class Action Settlement, which, among other things, provided for a “class wide” settlement as well as a release of claims against Dispersant Defendants, including National Response Corporation. Further, National Response Corporation successfully moved the court to dismiss all claims against it based on derivative immunity, as it was acting at the direction of the U.S. Government. In early 2018, BP began asserting an alleged contractual right of indemnity against National Response Corporation and others in post-settlement lawsuits brought by persons who had either chosen not to participate in the class-wide agreement or whose injuries were allegedly manifest after the period covered by the claim submission process. The Company advised BP that it considers the attempt to bring National Response Corporation back into previously settled litigation to be improper and moved for a declaratory judgment that it owes no indemnity or contribution to BP, raising various arguments, including BP’s own actions and conduct over the preceding nine years with respect to these claims (including its failure to seek indemnity) and the resultant prejudice to National Response Corporation, BP’s waiver of any indemnity, and the court’s prior finding that National Response Corporation is entitled to derivative immunity. In response, BP asserted counterclaims against National Response Corporation for a declaratory judgment that National Response Corporation must indemnify BP under certain circumstances and for unjust enrichment. National Response Corporation successfully moved to dismiss the unjust enrichment claim. The parties filed simultaneous judgment on the pleadings briefs in February 2020, and all oppositions were filed on March 16, 2020. On May 4, 2020, the court found in favor of National Response Corporation, and held that the Company is not liable to BP or any back end litigation plaintiffs for any damages related to the Deepwater Horizon oil spill. BP timely appealed the ruling on June 11, 2020. The Company is currently unable to estimate the range of possible losses associated with this proceeding. However, the Company also believes that, were it deemed to have liability arising out of or related to BP’s indemnity claims, such liability would be covered by an indemnity by SEACOR Holdings Inc., the former owner of National Response Corporation, in favor of National Response Corporation and its affiliates.
In January 2019, Kevin Sullivan, a driver for NRC from May 1, 2018 to August 22, 2018 filed a class action complaint against NRC in California Superior Court (Kevin Sullivan et. Al. v. National Response Corp., NRC Environmental Services, Inc. and Paul Taveira et al.) alleging the failure by the defendants to provide meal and rest breaks required by California law and requiring employees to work off the clock. Mr. Sullivan’s complaint also asserted a claim under the California Labor Code Private Attorneys General Act (“PAGA”), which permits an employee to assert a claim for violations of certain California Labor Code provisions on behalf of all aggrieved employees to recover statutory penalties that could be recovered by the State of California. On April 17, 2019, NRC filed a motion to compel individual arbitration, strike Mr. Sullivan’s class action claims and stay the PAGA claim pending the outcome of Mr. Sullivan’s individual claim; the court subsequently granted NRC’s motion to compel. In response, Mr. Sullivan amended his complaint to dismiss the class claims without prejudice and proceed solely with the PAGA claim. Unlike class claims, PAGA claims cannot be waived by an employee’s agreement to individual arbitration; therefore, the case is proceeding as a pure representative PAGA claim only, absent any individual or class claims against the Company or NRC. The parties participated in a confidential mediation on August 3, 2020, and tentatively reached a settlement resolving the pending PAGA claim, subject to the parties’ final agreement on a definitive settlement agreement and court approval of such settlement agreement.
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
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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. In addition to initiating and conducting our own investigation into the incident, we fully cooperated with the Idaho Department of Environmental Quality, the U.S. Environmental Protection Agency and the Occupational Safety and Health Administration (“OSHA”) to support their comprehensive and independent investigations of the incident. On January 10, 2020, we entered into a settlement agreement with OSHA settling a complaint made by OSHA relating to the incident for $50,000. On January 28, 2020, the Occupational Safety and Health Review Commission issued an order terminating the proceeding relating to such OSHA complaint. We have not otherwise been named as a defendant in any action relating to the incident. 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. Reference is also made to those risk factors included in Part I, Item 1A of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019 and Part II, Item 1A of the Company’s Quarterly Report on Form 10-Q for the three months ended March 31, 2020.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On June 1, 2016, the Company’s Board of Directors authorized the repurchase of up to $25.0 million of the Company’s outstanding common stock. On May 29, 2018, the repurchase program was extended. On December 30, 2019, the Company’s Board of Directors authorized the repurchase of up to $25.0 million of the Company’s outstanding warrants (such dollar amount considered in the aggregate with the dollar amount of shares of common stock repurchased by the Company, if any, under the Company’s share repurchase program) as part of the Company’s share repurchase program. On June 6, 2020, our authorization by the Company’s Board of Directors to repurchase the Company’s outstanding shares of common stock and warrants under the share repurchase program expired. In the future, the Board of Directors may consider reauthorizing the repurchase program at any time, and the timing of any future repurchases of common stock or warrants will be based upon prevailing market conditions and other factors. The Company may from time to time also consider other options for repurchasing some or all of its warrants, including but not limited to a tender offer for all of the outstanding warrants. During the six months ended June 30, 2020, the Company repurchased 397,600 shares of common stock in an aggregate amount of $17.3 million under the repurchase program.
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The following table summarizes the purchases of shares of our common stock during the six months ended June 30, 2020:
| | | | | | | | | | |
|
| |
| | |
| Total Number of |
| Approximate Dollar | |
| | | | | | | Shares Purchased as | | Value of Shares that | |
| | | | | | | Part of Publicly | | May Yet be Purchased | |
| | Total Number of | | Average Price | | Announced Plan or | | Under the Plans or | ||
Period |
| Shares Purchased |
| Paid per Share |
| Program |
| Programs | ||
January 1 to 31, 2020 (1) |
| 17,169 | | $ | 57.91 |
| — | | $ | 25,000,000 |
February 1 to 29, 2020 |
| — | |
| — |
| — | |
| 25,000,000 |
March 1 to 31, 2020 |
| 397,600 | |
| 43.61 |
| 17,337,594 | |
| 7,662,406 |
April 1 to 30, 2020 |
| — | |
| — |
| — | |
| 7,662,406 |
May 1 to 31, 2020 |
| — | |
| — |
| — | |
| 7,662,406 |
June 1 to 30, 2020 |
| — | |
| — |
| — | |
| 7,662,406 |
Total |
| 414,769 | | $ | 44.20 |
| 17,337,594 | | $ | 7,662,406 |
(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
| ||
10.1 | | |
| | |
15 | | |
| | |
31.1 | | Certification of CEO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| | |
31.2 | | Certification of CFO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| | |
32 | | |
| | |
101 | | The following materials from the quarterly report on Form 10-Q of US Ecology, Inc. for the quarter ended June 30, 2020 formatted in Extensible Business Reporting Language (Inline 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 |
| | |
104 | | The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2020, 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.
| |
| US Ecology, Inc. |
| (Registrant) |
| |
Date: August 7, 2020 | /s/ Eric L. Gerratt |
| Eric L. Gerratt |
| Executive Vice President, Chief Financial Officer and Treasurer |
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