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| Share Name | Share Symbol | Market | Type |
|---|---|---|---|
| US Ecology Inc | NASDAQ:ECOL | NASDAQ | Common Stock |
| Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
|---|---|---|---|---|---|---|---|---|---|---|
| 0.00 | 0.00% | 47.99 | 52.80 | 45.60 | 0 | 00:00:00 |
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 March 31, 2022
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 April 27, 2022, there were 31,512,324 shares of the registrant’s Common Stock outstanding.
US ECOLOGY, INC.
FORM 10-Q
TABLE OF CONTENTS
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
US ECOLOGY, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except par value amount)
| March 31, 2022 |
| December 31, 2021 | |||
Assets | ||||||
Current Assets: | ||||||
Cash and cash equivalents | $ | 74,186 | $ | 67,487 | ||
Receivables, net |
| 248,233 |
| 250,154 | ||
Prepaid expenses and other current assets |
| 30,012 |
| 32,136 | ||
Income taxes receivable | 7,961 | 14,441 | ||||
Total current assets |
| 360,392 |
| 364,218 | ||
Property and equipment, net |
| 455,041 |
| 456,384 | ||
Operating lease assets | 54,884 | 43,607 | ||||
Restricted cash and investments |
| 1,532 |
| 1,567 | ||
Intangible assets, net |
| 482,127 |
| 489,573 | ||
Goodwill |
| 413,526 |
| 413,126 | ||
Other assets |
| 51,171 |
| 36,923 | ||
Total assets | $ | 1,818,673 | $ | 1,805,398 | ||
Liabilities and Stockholders’ Equity | ||||||
Current Liabilities: | ||||||
Accounts payable | $ | 63,933 | $ | 64,793 | ||
Deferred revenue |
| 19,903 |
| 15,950 | ||
Accrued liabilities |
| 47,589 |
| 51,265 | ||
Accrued salaries and benefits |
| 26,061 |
| 29,438 | ||
Income taxes payable |
| 231 |
| 559 | ||
Current portion of long-term debt | 3,359 | 3,359 | ||||
Current portion of closure and post-closure obligations |
| 6,322 |
| 5,771 | ||
Current portion of operating lease liabilities | 17,780 | 15,799 | ||||
Total current liabilities |
| 185,178 |
| 186,934 | ||
Long-term debt |
| 734,285 |
| 735,125 | ||
Long-term closure and post-closure obligations |
| 93,332 |
| 93,149 | ||
Long-term operating lease liabilities | 37,991 | 28,477 | ||||
Other long-term liabilities |
| 12,947 |
| 13,907 | ||
Deferred income taxes, net |
| 123,702 |
| 123,482 | ||
Total liabilities |
| 1,187,435 |
| 1,181,074 | ||
Commitments and contingencies (See Note 15) | ||||||
Stockholders’ Equity: | ||||||
Common stock $0.01 par value per share, 50,000 authorized; 31,512 shares issued and outstanding |
| 315 |
| 315 | ||
Additional paid-in capital |
| 818,707 |
| 821,970 | ||
Retained deficit |
| (192,136) |
| (183,115) | ||
Treasury stock, at cost, 141 and 242 shares, respectively |
| (6,177) |
| (10,652) | ||
Accumulated other comprehensive income (loss) |
| 10,529 |
| (4,194) | ||
Total stockholders’ equity |
| 631,238 |
| 624,324 | ||
Total liabilities and stockholders’ equity | $ | 1,818,673 | $ | 1,805,398 | ||
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 March 31, | ||||||
| 2022 |
| 2021 | |||
Revenue | $ | 240,980 | $ | 228,619 | ||
Direct operating costs |
| 187,567 |
| 175,746 | ||
Gross profit |
| 53,413 |
| 52,873 | ||
Selling, general and administrative expenses |
| 57,336 |
| 51,368 | ||
Operating (loss) income |
| (3,923) |
| 1,505 | ||
Other income (expense): | ||||||
Interest income |
| 229 |
| 273 | ||
Interest expense |
| (6,821) |
| (7,357) | ||
Foreign currency loss |
| (698) |
| (371) | ||
Other |
| 177 |
| 3,710 | ||
Total other expense |
| (7,113) |
| (3,745) | ||
Loss before income taxes |
| (11,036) |
| (2,240) | ||
Income tax benefit |
| (2,014) |
| (1,444) | ||
Net loss | $ | (9,022) | $ | (796) | ||
Loss per share: | ||||||
Basic | $ | (0.29) | $ | (0.03) | ||
Diluted | $ | (0.29) | $ | (0.03) | ||
Shares used in loss per share calculation: | ||||||
Basic |
| 31,208 |
| 31,104 | ||
Diluted |
| 31,208 |
| 31,104 | ||
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 March 31, | ||||||
| 2022 |
| 2021 | |||
Net loss | $ | (9,022) | $ | (796) | ||
Other comprehensive income: | ||||||
Foreign currency translation gain |
| 1,469 |
| 1,439 | ||
Net changes in interest rate hedge, net of taxes of $3,523 and $2,450, respectively | 13,254 | 9,217 | ||||
Comprehensive income, net of tax | $ | 5,701 | $ | 9,860 | ||
The accompanying notes are an integral part of these consolidated financial statements.
5
US ECOLOGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Three Months Ended March 31, | ||||||
| 2022 |
| 2021 | |||
Cash flows from operating activities: | ||||||
Net loss | $ | (9,022) | $ | (796) | ||
Adjustments to reconcile net loss to net cash provided by operating activities: | ||||||
Depreciation and amortization of property and equipment |
| 16,900 |
| 18,234 | ||
Amortization of intangible assets |
| 7,872 |
| 9,135 | ||
Accretion of closure and post-closure obligations |
| 1,227 |
| 1,182 | ||
Unrealized foreign currency gain |
| (852) |
| (315) | ||
Deferred income taxes |
| (3,467) |
| (3,781) | ||
Share-based compensation expense |
| 1,948 |
| 1,928 | ||
Share-based payments of business development and integration expenses |
| 120 |
| 163 | ||
Unrecognized tax benefits |
| 13 | 12 | |||
Net gain on disposition of assets |
| (245) |
| (221) | ||
Amortization of debt issuance costs | 589 | 577 | ||||
Amortization of debt discount | 40 | 40 | ||||
Change in fair value of minority interest investment | — | (3,509) | ||||
Changes in assets and liabilities: | ||||||
Receivables |
| 3,865 |
| (680) | ||
Income taxes receivable |
| 6,514 |
| 1,276 | ||
Other assets |
| 1,106 |
| 1,114 | ||
Accounts payable and accrued liabilities |
| (4,155) |
| (3,647) | ||
Deferred revenue |
| 3,917 |
| 2,214 | ||
Accrued salaries and benefits |
| (3,407) |
| (3,028) | ||
Income taxes payable |
| (329) |
| (98) | ||
Closure and post-closure obligations |
| (517) |
| (337) | ||
Net cash provided by operating activities |
| 22,117 |
| 19,463 | ||
Cash flows from investing activities: | ||||||
Purchases of property and equipment |
| (16,180) |
| (9,614) | ||
Proceeds from sale of property and equipment |
| 438 |
| 1,623 | ||
Minority interest investment | — | (712) | ||||
Proceeds from sale of short-term investments | 1,932 | — | ||||
Purchases of restricted investments |
| — |
| (913) | ||
Proceeds from sale of restricted investments |
| — |
| 934 | ||
Net cash used in investing activities |
| (13,810) |
| (8,682) | ||
Cash flows from financing activities: | ||||||
Proceeds from short-term borrowings | 1,959 | 3,227 | ||||
Payments on short-term borrowings | (1,959) | (2,950) | ||||
Payments on long-term debt | (1,125) | (1,125) | ||||
Payment of equipment financing obligations | (1,218) | (1,461) | ||||
Repurchase of common stock |
| (12) |
| (465) | ||
Net cash used in financing activities |
| (2,355) |
| (2,774) | ||
Effect of foreign exchange rate changes on cash |
| 712 |
| 708 | ||
Increase in Cash and cash equivalents and restricted cash |
| 6,664 |
| 8,715 | ||
Cash and cash equivalents and restricted cash at beginning of period |
| 69,054 |
| 75,104 | ||
Cash and cash equivalents and restricted cash at end of period | $ | 75,718 | $ | 83,819 | ||
Reconciliation of Cash and cash equivalents and restricted cash: | ||||||
Cash and cash equivalents at beginning of period | 67,487 | 73,848 | ||||
Restricted cash at beginning of period | 1,567 | 1,256 | ||||
Cash and cash equivalents and restricted cash at beginning of period | $ | 69,054 | $ | 75,104 | ||
Cash and cash equivalents at end of period | 74,186 | 82,354 | ||||
Restricted cash at end of period | 1,532 | 1,465 | ||||
Cash and cash equivalents and restricted cash at end of period | $ | 75,718 | $ | 83,819 | ||
Supplemental Disclosures: | ||||||
Income taxes (received) paid, net | $ | (4,746) | $ | 1,270 | ||
Interest paid | $ | 6,198 | $ | 6,404 | ||
Non-cash investing and financing activities: | ||||||
Capital expenditures in accounts payable | $ | 6,789 | $ | 4,569 | ||
Restricted common stock and common stock issued from treasury shares | $ | 4,487 | $ | 4,127 | ||
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 March 31, | ||||||
| 2022 |
| 2021 | |||
Total stockholders' equity, beginning balances | $ | 624,324 | $ | 601,931 | ||
Common stock: | ||||||
Beginning balances | $ | 315 | $ | 315 | ||
Ending balances | $ | 315 | $ | 315 | ||
Additional paid-in capital: | ||||||
Beginning balances | $ | 821,970 | $ | 820,567 | ||
Share-based compensation |
| 1,948 | 1,928 | |||
Share-based payments of business development and integration expenses | 120 | 161 | ||||
Issuance of restricted common stock and common stock from treasury shares | (5,331) | (4,838) | ||||
Ending balances | $ | 818,707 | $ | 817,818 | ||
Retained deficit: | ||||||
Beginning balances | $ | (183,115) | $ | (188,452) | ||
Net loss |
| (9,022) | (796) | |||
Other | 1 | (1) | ||||
Ending balances | $ | (192,136) | $ | (189,249) | ||
Treasury stock: | ||||||
Beginning balances | $ | (10,652) | $ | (15,841) | ||
Repurchase of common stock |
| (12) | (465) | |||
Issuance of restricted common stock and common stock from treasury shares | 4,487 | 4,127 | ||||
Ending balances | $ | (6,177) | $ | (12,179) | ||
Accumulated other comprehensive income (loss): | ||||||
Beginning balances | $ | (4,194) | $ | (14,658) | ||
Other comprehensive income |
| 14,723 | 10,656 | |||
Ending balances | $ | 10,529 | $ | (4,002) | ||
Total stockholders' equity, ending balances | $ | 631,238 | $ | 612,703 | ||
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, 2021. The results of operations for the three months ended March 31, 2022 are not necessarily indicative of the results to be expected for the entire year ending December 31, 2022.
The Company’s consolidated balance sheet as of December 31, 2021 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 March 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2020-04, “Facilitation of the Effects of Reference Rate Reform on Financial Reporting” (Topic 848). The ASU provides optional expedients and exceptions for applying GAAP to transactions affected by reference rate (e.g., LIBOR) reform if certain criteria are met, for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. The ASU is effective as of March 12, 2020 through December 31, 2022. We will evaluate transactions or contract modifications occurring as a result of reference rate reform and determine whether to apply the optional guidance on an ongoing basis. The ASU is currently not expected to have a material impact on our consolidated financial statements.
8
Republic Services, Inc. Merger Agreement
On February 8, 2022, we entered into the previously disclosed Agreement and Plan of Merger (the “Merger Agreement”) with Republic Services, Inc., a Delaware corporation (“Republic”) and Bronco Acquisition Corp., a Delaware corporation and a wholly-owned subsidiary of Republic (“Merger Sub”). The Merger Agreement provides that, upon the terms and subject to the conditions set forth in the Merger Agreement, Merger Sub will merge with and into the Company (the “Merger”), with the Company continuing as the surviving corporation and as a wholly-owned subsidiary of Republic.
The foregoing description of the Merger Agreement is a summary only and is qualified in its entirety by reference to the complete text of the Merger Agreement filed as Exhibit 2.1 in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021.
On March 30, 2022 the waiting period under Hart Scott-Rodino Anitrust Improvements Act of 1976, as amended, expired with respect to the Merger, and on April 26, 2022 we held a Special Meeting of the stockholders of the Company wherein we received the necessary affirmative vote to consummate the Merger. The transaction is currently expected to close on May 2, 2022.
NOTE 2. REVENUES
Effective in the second quarter of 2021, we made changes to the manner in which we evaluate revenues associated with our various response-based services, including emergency response, standby services and remediation. As a result, revenues from Emergency Response and Domestic Standby Services, which were formerly presented as discrete service lines, are now combined and presented as a single “Emergency Response” service line and certain revenues formerly classified as Domestic Standby Services are now classified as Remediation. Throughout this Quarterly Report on Form 10-Q, our disaggregated revenues for all periods presented have been recast to reflect these changes.
The following table presents our revenue disaggregated by our reportable segments and service lines:
9
| (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 March 31, 2022 and 2021, 20% and 24%, respectively, of our treatment and disposal revenue was derived from Event Business projects. Base Business revenue accounted for 80% and 76% of our treatment and disposal revenue for the three months ended March 31, 2022 and 2021, 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 services such as spill response, waste analysis and treatment and disposal planning as well as government-mandated, commercial standby oil spill compliance solutions and services that we provide 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. |
| (8) | 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:
| (1) | Includes Mexico, Asia Pacific, and Latin America and Caribbean geographical regions. |
10
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 March 31, 2022 and 2021, we recognized $13.5 million and $10.7 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.
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. 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, 2021 | $ | (9,375) | $ | 5,181 | $ | (4,194) | |||
Other comprehensive income before reclassifications, net of tax |
| 1,469 |
| 12,746 |
| 14,215 | |||
Amounts reclassified out of AOCI, net of tax (1) |
| — |
| 508 |
| 508 | |||
Other comprehensive income, net |
| 1,469 |
| 13,254 |
| 14,723 | |||
Balance at March 31, 2022 | $ | (7,906) | $ | 18,435 | $ | 10,529 | |||
| (1) | Before-tax reclassifications of $642,000 ($508,000 after-tax) for the three months ended March 31, 2022, 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 |
11
| maturity. Amounts in AOCI expected to be reclassified to interest expense over the next 12 months total approximately $1.2 million ($927,000 after-tax). |
| (2) | Before-tax reclassifications of $1.1 million ($894,000 after-tax) for the three months ended March 31, 2021, 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. |
NOTE 4. CONCENTRATIONS AND CREDIT RISK
Major Customers
No customer accounted for more than 10% of total revenue for the three months ended March 31, 2022 or 2021, respectively. No customer accounted for more than 10% of total trade receivables as of March 31, 2022 or December 31, 2021.
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 may be 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. As of March 31, 2022, the Company did not have any trade receivables that are eligible for submission to the OSLTF for reimbursement.
NOTE 5. RECEIVABLES
Receivables consisted of the following:
| March 31, | December 31, | ||||
$s in thousands | 2022 |
| 2021 | |||
Trade | $ | 186,906 | $ | 183,747 | ||
Unbilled revenue |
| 60,513 |
| 62,029 | ||
Other |
| 3,834 |
| 7,421 | ||
Total receivables |
| 251,253 |
| 253,197 | ||
Allowance for credit losses |
| (3,020) |
| (3,043) | ||
Receivables, net | $ | 248,233 | $ | 250,154 | ||
12
NOTE 6. 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 and interest rate swap agreements. The estimated fair value of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate their carrying value due to the short-term nature of these instruments.
In each of September 2019 and March 2021, the Company invested $7.9 million and $712,000, respectively, in the preferred stock of a privately held company. 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. In March 2021, in connection with our incremental investment of $712,000, we observed that the fair value of our initial investment of $7.9 million increased by $3.5 million and, accordingly, recognized a gain on our minority interest investment of $3.5 million. The fair value of our minority interest investment is included in Other assets in the Company’s consolidated balance sheets. Changes in the fair value of our minority interest investment are included in Other income in the Company’s consolidated statements of operations. As of March 31, 2022, there have been no other 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 March 31, 2022, the fair value of the Company’s variable rate term loan was estimated to be $438.5 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’s assets and liabilities measured at fair value on a recurring basis consisted of the following:
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(1) We had short-term investments in fixed-income securities, including U.S. Treasury and U.S. agency securities as of December 31, 2021. We measured the fair value of U.S. Treasury securities using quoted prices for identical assets in active markets. We measured the fair value of U.S. agency securities using observable market activity for similar assets. The fair value of our fixed-income securities approximated 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-year and end-of-year 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 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 assets in the Company’s consolidated balance sheets as of March 31, 2022 and December 31, 2021, respectively.
NOTE 7. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
| March 31, | December 31, | ||||
$s in thousands | 2022 |
| 2021 | |||
Cell development costs | $ | 204,067 | $ | 203,217 | ||
Land and improvements |
| 74,524 |
| 74,298 | ||
Buildings and improvements |
| 137,204 |
| 138,659 | ||
Railcars |
| 17,299 |
| 17,299 | ||
Vehicles, vessels and other equipment |
| 352,925 |
| 350,950 | ||
Construction in progress |
| 65,798 |
| 54,609 | ||
Total property and equipment |
| 851,817 |
| 839,032 | ||
Accumulated depreciation and amortization |
| (396,776) |
| (382,648) | ||
Property and equipment, net | $ | 455,041 | $ | 456,384 | ||
Depreciation and amortization expense for the three months ended March 31, 2022 and 2021 was $16.9 million and $18.2 million, respectively.
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NOTE 8. 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 to 15 years, and include or more options to renew, with renewal terms extending a 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:
| (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 $14.6 million and $13.3 million as of March 31, 2022 and December 31, 2021, 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. |
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Lease expense consisted of the following:
| (1) | Included in Direct operating costs and Selling, general, and administrative expenses in the Company’s consolidated statements of operations. Operating lease cost includes short-term leases, excluding expenses relating to leases with a term of one month or less, which are not material. Operating lease cost excludes variable lease costs which are not material. |
| (2) | Included in Direct operating costs in the Company’s consolidated statements of operations. |
| (3) | Included in Interest expense in the Company’s consolidated statements of operations. |
Supplemental cash flow information related to our leases is as follows:
NOTE 9. GOODWILL AND INTANGIBLE ASSETS
Changes in goodwill for the three months ended March 31, 2022 consisted of the following:
| Waste Solutions | Field Services | Energy Waste | ||||||||||||||||||
Accumulated | Accumulated | Accumulated | |||||||||||||||||||
$s in thousands |
| Gross |
| Impairment |
| Gross |
| Impairment |
| Gross |
| Impairment |
| Total | |||||||
Balance at December 31, 2021 | $ | 166,925 | $ | (6,870) | $ | 237,368 | $ | (19,900) | $ | 399,503 | $ | (363,900) | $ | 413,126 | |||||||
Foreign currency translation |
| 278 | — |
| 122 | — | — | — |
| 400 | |||||||||||
Balance at March 31, 2022 | $ | 167,203 | $ | (6,870) | $ | 237,490 | $ | (19,900) | $ | 399,503 | $ | (363,900) | $ | 413,526 | |||||||
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Intangible assets, net consisted of the following:
Amortization expense for the three months ended March 31, 2022 and 2021 was $7.9 million and $9.1 million, respectively. Foreign intangible asset carrying amounts are affected by foreign currency translation.
NOTE 10. DEBT
Long-term debt consisted of the following:
March 31, | December 31, | |||||
$s in thousands |
| 2022 |
| 2021 | ||
Revolving credit facility | $ | 303,000 | $ | 303,000 | ||
Term loan | 439,875 | 441,000 | ||||
Unamortized term loan discount and debt issuance costs | (5,231) | (5,516) | ||||
Total debt | 737,644 | 738,484 | ||||
Current portion of long-term debt | (3,359) | (3,359) | ||||
Long-term debt | $ | 734,285 | $ | 735,125 | ||
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., as an issuing lender, that initially provided for a $500.0 million, five-year revolving credit facility (the “Revolving Credit Facility”).
On August 6, 2019, Predecessor US Ecology entered into the first amendment (the “First Amendment”) to the Credit Agreement. 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 (as defined in the Credit Agreement) 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.
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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 London Inter-Bank Offered Rate (“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 three months ended March 31, 2022, the effective interest rate on the term loan, including the impact of the amortization of debt issuance costs, was 2.91%.
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.
On June 29, 2021, Predecessor US Ecology entered into the fourth amendment (the “Fourth Amendment”) to the Credit Agreement. Among other things, the Fourth Amendment amended the Credit Agreement to extend the maturity date for the existing revolving credit facility to June 29, 2026 (or such earlier date as the revolving credit facility may otherwise terminate pursuant to the terms of the Credit Agreement). The Fourth Amendment also amended the Credit Agreement (i) to extend the existing covenant relief period to end on the earlier of December 31, 2022 and the date Predecessor US Ecology elects to end such covenant relief period pursuant to the terms therein and (ii) to permanently increase Predecessor US Ecology’s consolidated total net leverage ratio requirement as of the end of each fiscal quarter ending on and after December 31, 2022 to 4.50 to 1.00. During the covenant relief period until the fiscal quarter ending December 31, 2022, the Fourth 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 4.50 to 1.00 ratio otherwise in effect after giving effect to the Fourth Amendment, subject to compliance with certain restrictions on restricted payments and permitted acquisitions during such covenant relief period. Furthermore, after giving effect to the Fourth Amendment and whether or not the covenant relief period is in effect, (i) if the Borrower’s consolidated total net leverage ratio is equal to or greater than 4.00 to 1.00 but less than 4.50 to 1.00, the interest rate on all outstanding borrowings of revolving credit loans under the Credit Agreement will step-up to the LIBOR plus 2.25% or a base rate plus 1.25% and the commitment fee will step-up to 0.375% and (ii) if Predecessor US Ecology’s consolidated total net leverage ratio is greater than 4.50 to 1.00, the interest rate on all outstanding borrowings of revolving credit loans under the Credit Agreement will step-up to LIBOR plus 2.50% or a base rate plus 1.50% and the commitment fee will step-up to 0.40%, in each case, pursuant to the terms of the Credit Agreement. The Fourth Amendment also reset any outstanding usage of certain negative covenant baskets, including baskets in connection with the indebtedness, liens, investments, asset dispositions, restricted payments and affiliate transactions negative covenants.
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). As modified by the Fourth Amendment, 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
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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 EBITDA (as defined in the Credit Agreement), as set forth in the table below:
During the three months ended March 31, 2022, 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 3.94%. Interest only payments are due either quarterly or on the last day of any interest period, as applicable.
As modified by the Fourth Amendment, 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 March 31, 2022, there were $303.0 million of revolving credit loans outstanding on the Revolving Credit Facility, which 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 March 31, 2022, there were no borrowings outstanding subject to the Sweep Arrangement.
As of March 31, 2022, the availability under the Revolving Credit Facility was $27.7 million, subject to our leverage covenant limitation, with $12.2 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 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 Outstandings exceed 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.
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).
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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 as financial maintenance covenants a maximum consolidated total net leverage ratio and a consolidated interest coverage ratio. Except as further modified by the Third Amendment and Fourth Amendment as described above, our consolidated total net leverage ratio as of the last day of each fiscal quarter may not exceed 4.50:1:00. Our consolidated interest coverage ratio as of the last day of any fiscal quarter may not be less than 3.00 to 1.00. At March 31, 2022, we were in compliance with all of the financial covenants in the Credit Agreement. It is currently expected that all outstanding borrowings under the Credit Agreement will be repaid and the Credit Agreement will be terminated in connection with the consummation of the Merger.
Interest Rate Swap
In March 2020, the Company entered into an interest rate swap agreement with Wells Fargo, effectively fixing the interest rate on $430.0 million, or approximately 58%, of the Revolving Credit Facility and term loan borrowings outstanding as of March 31, 2022. 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) remained probable, the $1.8 million net loss related to the terminated swap reported in AOCI at the termination date was amortized as additional interest expense over its original maturity.
NOTE 11. CLOSURE AND POST-CLOSURE OBLIGATIONS
Our accrued closure and post-closure liability represent the expected future costs, including corrective actions, associated with closure and post-closure of our operating and non-operating disposal facilities. We record the fair value of our closure and post-closure obligations as a liability in the period in which the regulatory obligation to retire a specific asset is triggered. For our individual landfill cells, the required closure and post-closure obligations under the terms of our permits and our intended operation of the landfill cell are triggered and recorded when the cell is placed into service and waste is initially disposed in the landfill cell. The fair value is based on the total estimated costs to close the landfill cell and perform post-closure activities once the landfill cell has reached capacity and is no longer accepting waste. We perform periodic reviews of both non-operating and operating facilities and revise accruals for estimated closure and post-closure, remediation or other costs as necessary. Recorded liabilities are based on our best estimates of current costs and are updated periodically to include the effects of existing technology, presently enacted laws and regulations, inflation and other economic factors.
Changes to closure and post-closure obligations consisted of the following:
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NOTE 12. 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 used a discrete effective tax rate method to calculate taxes for the three months ended March 31, 2022. We determined that since relatively small changes in estimated “ordinary” income would result in significant changes in the estimated AETR, that the historical method would not provide a reliable estimate for the three months ended March 31, 2022.
Income tax benefit for the three months ended March 31, 2022 was $2.0 million, resulting in an effective tax rate of 18.2%. Income tax benefit for the three months ended March 31, 2021 was $1.4 million resulting in an effective tax rate of 64.5%. The decrease in our effective tax rate for the three months ended March 31, 2022 compared to the three months ended March 31, 2021 was primarily due to non-deductible business development costs for the three months ended March 31, 2022, partially offset by a reduction in our state income taxes due to legislation enacted during the three months ended March 31, 2022.
Gross unrecognized tax benefits, included in Other long-term liabilities in the consolidated balance sheets, were $269,000 and $256,000 as of March 31, 2022 and December 31, 2021, respectively. The gross unrecognized tax benefits, if recognized by the Company, will result in a reduction of approximately $269,000 to the provision for income taxes. 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 in Interest expense and Selling, general and administrative expenses, respectively. The total accrued interest related to unrecognized tax benefits as of March 31, 2022 and December 31, 2021 were not significant. There is no accrual for penalties.
The Company files income tax returns in the U.S. Federal and various state, local and foreign jurisdictions. The Company is subject to examination by the Internal Revenue Service for tax years beginning in 2018. The 2017 through 2021 state tax returns are subject to examination by state tax authorities. Stablex Canada, Inc. is currently under examination by the Canadian Revenue Agency for years 2018 through 2020. The tax years 2017 through 2021 remain subject to examination in our significant foreign jurisdictions. The Company does not anticipate any material change as a result of any current examinations in progress.
NOTE 13. LOSS PER SHARE
Three Months Ended March 31, | ||||||||||||
2022 | 2021 | |||||||||||
$s and shares in thousands, except per share amounts |
| Basic |
| Diluted |
| Basic |
| Diluted | ||||
Net loss | $ | (9,022) | $ | (9,022) | $ | (796) | $ | (796) | ||||
Weighted average basic shares outstanding |
| 31,208 |
| 31,208 |
| 31,104 |
| 31,104 | ||||
Dilutive effect of share-based awards and warrants |
| — |
| — | ||||||||
Weighted average diluted shares outstanding |
| 31,208 |
| 31,104 | ||||||||
Loss per share | $ | (0.29) | $ | (0.29) | $ | (0.03) | $ | (0.03) | ||||
Anti-dilutive shares excluded from calculation |
| 4,207 |
| 4,369 | ||||||||
NOTE 14. EQUITY
Stock Repurchase Program
On June 6, 2020, the Company’s Board of Directors’ authorization 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
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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.
Omnibus Incentive Plan
On May 27, 2015, the stockholders of Predecessor US Ecology approved the Omnibus Incentive Plan (as amended, “Pre-Merger 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 Pre-Merger Omnibus Plan, amended and restated such plan and renamed it the Amended and Restated US Ecology, Inc. Omnibus Incentive Plan (the “Omnibus Plan”) for the purpose of issuing replacement awards to award recipients under the Omnibus Plan pursuant to the NRC 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, consultants and non-employee 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 employees, consultants and non-employee directors.
The Omnibus Plan expires on March 31, 2031 and authorizes 3,272,000 shares of common stock for grant over the life of the Omnibus Plan. As of March 31, 2022, 1,885,810 shares of common stock remain available for grant under the Omnibus Plan.
Subsequent to the approval of the Pre-Merger Omnibus Plan by Predecessor US Ecology in May 2015, we stopped granting equity awards under the American Ecology Corporation 2008 Stock Option Incentive Plan (“Pre-Merger 2008 Stock Option Plan”). However, in connection with the closing of the NRC Merger, the Company assumed the Pre-Merger 2008 Stock Option Plan, amended and restated such plan and renamed it in the Amended and Restated US Ecology, Inc. 2008 Stock Option Incentive Plan (the “2008 Stock Option Plan”) solely for the purpose of issuing replacement awards to award recipients thereunder and remains in effect solely for the settlement of awards granted under such plan and no future grants may be made 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 solely for the purpose of issuing replacement awards to award recipients thereunder pursuant to the NRC Merger Agreement, and no future grants may be made under such plan.
Performance Stock Units (“PSUs”), Restricted Stock and Restricted Stock Units (“RSUs”)
On January 3, 2022, the Company granted 62,178 PSUs to certain employees. Each PSU represents the right to receive, on the settlement date, one share of the Company’s common stock. The total number of PSUs each participant is eligible to earn ranges from 0% to 250% of the target number of PSUs granted. The actual number of PSUs that will vest and be settled in shares is determined based on achievement of certain Company financial performance metrics over a one-year performance period beginning January 1, 2022, further adjusted based on total shareholder return relative to a set of peer companies at the end of a three-year performance period beginning January 1, 2022. The fair value of the PSUs estimated on the grant date using a Monte Carlo simulation was $34.65 per unit. Compensation expense is recorded over the awards’ vesting period.
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Assumptions used in the Monte Carlo simulation to calculate the fair value of the PSUs granted on January 3, 2022 are as follows:
| 2022 |
| ||
Stock price on grant date | $ | 31.86 | ||
Expected term |
| 3.0 | years | |
Expected volatility | 40.1 | % | ||
Risk-free interest rate |
| 1.0 | % | |
A summary of our PSU, restricted stock and RSU activity for the three months ended March 31, 2022 is as follows:
During the three months ended March 31, 2022, 589 PSUs vested and PSU holders earned 589 shares of the Company’s common stock.
Stock Options
A summary of our stock option activity for the three months ended March 31, 2022 is as follows:
Weighted | |||||
Average | |||||
Exercise | |||||
| Shares |
| Price | ||
Outstanding as of December 31, 2021 |
| 546,594 | $ | 44.59 | |
Outstanding as of March 31, 2022 |
| 546,594 | $ | 44.59 | |
Exercisable as of March 31, 2022 |
| 386,763 | $ | 47.16 | |
Treasury Stock
During the three months ended March 31, 2022, the Company repurchased 379 shares of the Company’s common stock in connection with the net share settlement of employee withholding taxes due on vested equity awards at an average cost of $31.89 per share and issued 102,193 shares of common stock from our treasury stock in connection with employee equity awards at an average cost of $43.91 per share
Warrants
At March 31, 2022, there were a total of 3,772,753 warrants outstanding. Each warrant entitles the holder thereof to purchase one share of common stock at a price of $58.67 per share, subject to certain adjustments. The warrants may be exercised only for a whole number of shares of common stock. No fractional shares will be issued upon exercise of the warrants. The warrants will expire at 5:00 p.m. New York City time on October 17, 2023, or earlier upon redemption or liquidation. The warrants are listed on the Nasdaq Capital Market under the symbol “ECOLW”. The Company may call the warrants for redemption, in whole and not in part, at a price of $0.01 per warrant, upon not less than 30 days’ prior written notice of redemption to each warrant holder, if, and only if, the reported last sale price of common stock equals or exceeds $91.84 per share on each of 20 trading days within the 30 trading-day period ending on the business day prior to
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the date on which notice of the redemption is given and provided that there is an effective registration statement covering the shares of common stock issuable on exercise of the warrants and subject to the satisfaction of certain other requirements. The warrants were determined to be equity classified in accordance with ASC 815, Derivatives and Hedging and ASC 480, Distinguishing Liabilities from Equity.
Dividends
The Company did not pay any dividends during the three months ended March 31, 2022 or the three months ended March 31, 2021.
NOTE 15. 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. 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. On January 19, 2022, the U.S. Court of Appeals for the Fifth Circuit held with respect to NRC that the district court erred in stating that BP was not entitled to indemnity from NRC under any circumstances but remanded to the district court for a claim-specific factual inquiry. The Court made clear that indemnity was only possible in the event of gross negligence or willful misconduct by NRC in cases where the claims in question were not otherwise lost under Texas law. The Company is currently unable to estimate the range of possible losses associated with this proceeding, although the Company believes that the opinion of the Court of Appeals positions it well on remand. Additionally, the Company believes that if it were deemed to have liability arising
24
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.
On November 17, 2018, an explosion occurred at our Grand View, Idaho facility. 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 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. In November 2020, we commenced a lawsuit against the generator and broker of the waste, the treatment of which we believe contributed to the Grand View explosion, seeking damages in connection with the losses suffered as a result of the incident. 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 September 2021, Robert Dell, a Marine Technician for NRC from June 2021 to September 2021, filed a class action complaint against US Ecology in the Alameda Superior Court for the State of California (Robert Dell et. al. v. US Ecology Illinois, Inc., US Ecology, Inc., and US Ecology Vernon, Inc.) alleging the failure by the defendants to pay wages and/or overtime, failure to provide accurate itemized wage statements, and failure to provide meal and rest breaks as required by California law. Further, Mr. Dell has put the Labor & Workforce Development Agency on notice in an effort to exhaust administrative remedies and enable him to bring an additional claim under the California Labor Code Private Attorneys General Act, 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. Given the recency of the filing, the Company has not yet filed a response to Mr. Dell’s complaint. The Company believes that Mr. Dell’s claims lack merit and intends to vigorously defend this action. The Company is currently unable to estimate the range of possible losses associated with this proceeding.
Commencing on March 15, 2022, purported individual stockholders of US Ecology filed complaints in the United States District Courts for the Southern District of New York, for the Eastern District of New York, and for the Eastern District of Pennsylvania, in the matters captioned Ryan O’Dell v. US Ecology, Inc., et al, No. 22-cv-2131 (S.D.N.Y., filed Mar. 15, 2022) (“O’Dell”), Ray Pizzaro v. US Ecology, Inc., et al, No. 22-cv-02144 (S.D.N.Y., filed Mar. 15, 2022) (“Pizzaro”), Matthew Whitfield v. US Ecology, Inc., et al, No. 22-cv-01515 (E.D.N.Y., filed Mar. 18, 2022) (“Whitfield”), Lewis D. Baker v. US Ecology, Inc., et al, No. 22-cv-01053 (E.D. Pa., filed Mar. 18, 2022) (“Baker”), and Teresa McCurdy v. US Ecology, Inc. et al, No. 22-cv-01685 (E.D.N.Y., filed Mar. 25, 2022) (“McCurdy,” and together, the “Transaction Litigation”). The complaints in the Transaction Litigation named as defendants the Company and the members of the Board. In addition to the Transaction Litigation, the Company received letters from four purported stockholders of the Company demanding additional disclosures related to the sale process leading to the proposed transaction, the Company's financial projections and the analyses performed by the Co-Financial Advisors.
The complaints in the Transaction Litigation generally alleged that the preliminary proxy statement filed by US Ecology with the SEC on March 11, 2022, in connection with the Merger Agreement was materially incomplete and misleading by allegedly failing to disclose purportedly material information relating to the sale process leading to the proposed transaction, the Company’s financial projections, and the analyses performed by Barclays Capital, Inc. and Houlihan Lokey Capital, Inc. (collectively, the “Co-Financial Advisors”). Each of the Complaints asserted violations of Section 14(a) of the Exchange Act, Rule 14a-9 promulgated thereunder, and Section 20(a) of the Exchange Act. In addition, the complaint in the Pizzaro action also asserted a claim for breach of fiduciary duty by the members of the Board in connection with the approval of the Merger Agreement and the disclosures in the preliminary proxy statement, and a claim against
25
US Ecology for aiding and abetting the alleged breaches of fiduciary duty. The Transaction Litigation sought, among other things, an injunction of the proposed transaction, rescission of the Merger Agreement, a declaratory judgment that the Company and the Board violated the Exchange Act and Rule 14a-9 promulgated thereunder, damages, plaintiff’s attorneys’ fees and expenses, and any other relief the court may deem just and proper. As of April 25, 2022, plaintiffs in each of the Transaction Litigation matters filed voluntary dismissals of their complaints.
It is possible that additional similar complaints could be filed in connection with the proposed transaction. If additional similar complaints are filed, absent new or significantly different allegations, US Ecology will not necessarily disclose such additional complaints or filings
Other than as described herein, as of March 31, 2022, we were not a party to any material pending legal proceedings and are not aware of any other claims that could, individually or in the aggregate, have a materially adverse effect on our financial position, results of operations or cash flows. The decision to accrue costs or write-off assets is based on the pertinent facts and our evaluation of present circumstances.
NOTE 16. OPERATING SEGMENTS
Financial Information by Segment
Our operations are managed in three reportable segments reflecting our internal management reporting structure and nature of services offered as follows:
Waste Solutions (formerly “Environmental Services”) - This segment provides safe and compliant specialty waste management services including treatment, disposal, beneficial re-use, and recycling of hazardous, non-hazardous, and other specialty waste at Company-owned treatment, storage, and disposal facilities, excluding the services within our Energy Waste segment.
Field Services (formerly “Field & Industrial Services”) - This segment provides safe and compliant logistics and response solutions focusing on “in-field’ service offerings through our network of 10-day transfer facilities. Our logistics solutions include specialty waste packaging, collection, transportation, and total waste management. Our response solutions include land and marine based emergency response, OSRO standby compliance, remediation, and industrial services. The Field Services segment completes our vertically integrated model and serves to increase waste volumes into our Waste Solutions segment.
Energy Waste - This segment provides safe and compliant energy waste management and critical support services to up-stream oil and gas customers in the Permian and Eagle Ford basins primarily operating in Texas. Services include spill containment and site remediation, equipment cleaning and maintenance services, specialty equipment rental, including tanks, pumps and containment, safety monitoring and management and transportation and disposal.
The operations not managed through our three reportable segments are recorded as “Corporate.” Corporate selling, general and administrative expenses include typical corporate items of a general nature such as certain labor, information technology, legal, accounting and other expenses not associated with a specific reportable segment. 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.
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Summarized financial information of our reportable segments is as follows:
Three Months Ended March 31, 2021 | |||||||||||||||
Waste | Field | Energy | |||||||||||||
$s in thousands |
| Solutions |
| Services |
| Waste |
| Corporate |
| Total | |||||
Revenue | $ | 104,142 | $ | 118,249 | $ | 6,228 | $ | — | $ | 228,619 | |||||
Depreciation, amortization and accretion | $ | 11,431 | $ | 11,371 | $ | 4,965 | $ | 784 | $ | 28,551 | |||||
Capital expenditures | $ | 8,145 | $ | 931 | $ | 283 | $ | 255 | $ | 9,614 | |||||
Total assets | $ | 789,277 | $ | 753,209 | $ | 228,689 | $ | 51,977 | $ | 1,823,152 | |||||
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 loss before interest expense, interest income, income tax expense/benefit, depreciation, amortization, share-based compensation, accretion of closure and post-closure liabilities, foreign currency gain/loss, business development and integration expenses and other income/expense. Adjusted EBITDA is a complement to results provided in accordance with GAAP and we believe that such information provides additional useful information to analysts, stockholders and other users to understand the Company’s operating performance. Since Adjusted EBITDA is not a measurement determined in accordance with GAAP and is thus susceptible to varying calculations, Adjusted EBITDA as presented may not be comparable to other similarly titled measures of other companies. Items excluded from Adjusted EBITDA are significant components in understanding and assessing our financial performance. Adjusted EBITDA should not be considered in isolation or as an alternative to, or substitute for, net income, cash flows generated by operations, investing or financing activities, or other financial statement data presented in the consolidated financial statements as indicators of financial performance or liquidity. Adjusted EBITDA has limitations as an analytical tool and should not be considered in isolation or a substitute for analyzing our results as reported under GAAP. Some of the limitations are:
| ● | Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs; |
| ● | Adjusted EBITDA does not reflect our interest expense, or the requirements necessary to service interest or principal payments on our debt; |
| ● | Adjusted EBITDA does not reflect our income tax expenses or the cash requirements to pay our taxes; |
| ● | Adjusted EBITDA does not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments; |
| ● | 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 loss to Adjusted EBITDA is as follows:
Adjusted EBITDA, by operating segment, is as follows:
| Three Months Ended March 31, | |||||
$s in thousands | 2022 |
| 2021 | |||
Waste Solutions |
| $ | 41,418 | $ | 40,136 | |
Field Services |
|
| 10,922 |
| 17,137 | |
Energy Waste | 4,725 | 1,258 | ||||
Corporate |
|
| (27,182) |
| (25,327) | |
Total |
| $ | 29,883 | $ | 33,204 | |
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:
| March 31, | December 31, | ||||
$s in thousands | 2022 |
| 2021 | |||
United States | $ | 846,701 | $ | 855,200 | ||
Canada |
| 66,360 |
| 65,437 | ||
EMEA | 14,802 | 15,604 | ||||
Other (1) | 9,305 | 9,716 | ||||
Total long-lived assets, net | $ | 937,168 | $ | 945,957 | ||
| (1) | Includes Mexico, Asia Pacific, and Latin America and Caribbean geographical regions. |
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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 March 31, 2022, the related consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows for the three-month periods ended March 31, 2022 and 2021, 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, 2021, and the related consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows for the year then ended (not presented herein); and in our report dated February 28, 2022, 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, 2021, 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 |
April 29, 2022 |
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The information contained in this section should be read in conjunction with our unaudited consolidated financial statements and related notes thereto appearing elsewhere in this quarterly report on Form 10-Q. In this report words such as “we,” “us,” “our,” “US Ecology” and “the Company” refer to US Ecology, Inc. and its subsidiaries.
OVERVIEW
US Ecology 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 three reportable segments reflecting our internal management reporting structure and nature of services offered as follows:
Waste Solutions (formerly “Environmental Services”) - This segment provides safe and compliant specialty waste management services including treatment, disposal, beneficial re-use, and recycling of hazardous, non-hazardous, and other specialty waste at Company-owned treatment, storage, and disposal facilities, excluding the services within our Energy Waste segment.
Field Services (formerly “Field & Industrial Services”) - This segment provides safe and compliant logistics and response solutions focusing on “in-field’ service offerings through our network of 10-day transfer facilities. Our logistics solutions include specialty waste packaging, collection, transportation, and total waste management. Our response solutions include land and marine based emergency response, OSRO standby compliance, remediation, and industrial services. The Field Services segment completes our vertically integrated model and serves to increase waste volumes into our Waste Solutions segment.
Energy Waste - This segment provides safe and compliant energy waste management and critical support services to up-stream oil and gas customers in the Permian and Eagle Ford basins primarily operating in Texas. Services include spill containment and site remediation, equipment cleaning and maintenance services, specialty equipment rental, including tanks, pumps and containment, safety monitoring and management and transportation and disposal.
The operations not managed through our three reportable segments are recorded as “Corporate.” Corporate selling, general and administrative expenses include typical corporate items of a general nature such as certain labor, information technology, legal, accounting and other expenses not associated with a specific reportable segment. 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.
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 Waste Solutions segment based on the industry of the waste generator, based on North American Industry Classification System codes.
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The composition of the Waste Solutions segment T&D revenues by waste generator industry for the three months ended March 31, 2022 and 2021 were as follows:
| (1) | Excludes all transportation service revenue. |
| (2) | Includes retail and wholesale trade, rate regulated, construction and other industries. |
We also categorize our Waste Solutions segment 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 March 31, 2022, Base Business revenue increased 13% compared to the three months ended March 31, 2021. For the three months ended March 31, 2022, approximately 80% of our total T&D revenue was derived from our Base Business, up from 76% for the three months ended March 31, 2021. Our business is highly competitive and no assurance can be given that we will maintain these revenue levels or increase our market share.
A significant portion of our disposal revenue is attributable to discrete Event Business projects which vary widely in size, duration and unit pricing. For the three months ended March 31, 2022, approximately 20% of our total T&D revenue was derived from Event Business projects, down from 24% for the three months ended March 31, 2021. For the three months ended March 31, 2022, Event Business revenue decreased 11% compared to the three months ended March 31, 2021. 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.
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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.
REPUBLIC SERVICES, INC. MERGER AGREEMENT
On February 8, 2022, we entered into the previously disclosed Agreement and Plan of Merger (the “Merger Agreement”) with Republic Services, Inc., a Delaware corporation (“Republic”) and Bronco Acquisition Corp., a Delaware corporation and a wholly-owned subsidiary of Republic (“Merger Sub”). The Merger Agreement provides that, upon the terms and subject to the conditions set forth in the Merger Agreement, Merger Sub will merge with and into the Company (the “Merger”), with the Company continuing as the surviving corporation and as a wholly-owned subsidiary of Republic.
The foregoing description of the Merger Agreement is a summary only and is qualified in its entirety by reference to the complete text of the Merger Agreement filed as Exhibit 2.1 in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021.
On March 30, 2022 the waiting period under Hart Scott-Rodino Anitrust Improvements Act of 1976, as amended, expired with respect to the Merger, and on April 26, 2022 we held a Special Meeting of the stockholders of the Company wherein we received the necessary affirmative vote to consummate the Merger. The transaction is currently expected to close on May 2, 2022.
COVID-19 PANDEMIC UPDATE
The COVID-19 pandemic continued to affect our business through the first quarter of 2022. The impact of temporary closures and staff reductions by industrial facilities has resulted in delays in mobilization and in regulatory approvals at our customers’ sites. Although we have seen evidence of volume recovery in 2021 and the first three months of 2022, as the economy continues to rebound and industrial facilities return to pre-pandemic levels of production, we have experienced cost and inflationary pressures in areas such as labor and supplies. We have also experienced, and expect to continue to experience, delays and deferments of some of our field services as our customers continue to limit on-site visitation and delay noncritical services based on business conditions. While uncertainty caused by the COVID-19 pandemic remains, including the spread of new variants of the virus and government and private sector responses to prevent and manage the disease, we expect to continue to see improvements in our business as vaccines become more widely available and vaccination rates increase.
The impact of the COVID-19 pandemic will continue to affect our results of operations for the foreseeable future. See “Item 1A – Risk Factors” of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021.
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RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2022 COMPARED TO THREE MONTHS ENDED MARCH 31, 2021
Operating results and percentage of revenues were as follows:
Three Months Ended March 31, | 2022 vs. 2021 | |||||||||||||||
$s in thousands |
| 2022 |
| % |
| 2021 |
| % |
| $ Change |
| % Change |
| |||
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Waste Solutions | $ | 114,766 |
| 48 | % | $ | 104,142 |
| 46 | % | $ | 10,624 |
| 10 | % | |
Field Services |
| 112,323 |
| 46 | % |
| 118,249 |
| 51 | % |
| (5,926) |
| (5) | % | |
Energy Waste | 13,891 | 6 | % | 6,228 | 3 | % | 7,663 | 123 | % | |||||||
Total | $ | 240,980 |
| 100 | % | $ | 228,619 |
| 100 | % | $ | 12,361 |
| 5 | % | |
Gross Profit |
|
|
|
|
|
|
|
|
|
|
| |||||
Waste Solutions | $ | 38,100 |
| 33 | % | $ | 34,950 |
| 34 | % | $ | 3,150 |
| 9 | % | |
Field Services |
| 12,148 |
| 11 | % |
| 18,306 |
| 15 | % |
| (6,158) |
| (34) | % | |
Energy Waste | 3,165 | 23 | % | (383) | (6) | % | 3,548 | (926) | % | |||||||
Total | $ | 53,413 |
| 22 | % | $ | 52,873 |
| 23 | % | $ | 540 |
| 1 | % | |
Selling, General & Administrative Expenses |
|
|
|
|
|
|
|
|
|
|
| |||||
Waste Solutions | $ | 6,909 |
| 6 | % | $ | 6,301 |
| 6 | % | $ | 608 |
| 10 | % | |
Field Services |
| 11,927 |
| 11 | % |
| 12,725 |
| 11 | % |
| (798) |
| (6) | % | |
Energy Waste | 2,881 | 21 | % | 3,343 | 54 | % | (462) | (14) | % | |||||||
Corporate |
| 35,619 |
| n/m |
| 28,999 |
| n/m |
| 6,620 |
| 23 | % | |||
Total | $ | 57,336 |
| 24 | % | $ | 51,368 |
| 22 | % | $ | 5,968 |
| 12 | % | |
Adjusted EBITDA |
|
|
|
|
|
|
|
|
|
|
| |||||
Waste Solutions | $ | 41,418 |
| 36 | % | $ | 40,136 |
| 39 | % | $ | 1,282 |
| 3 | % | |
Field Services |
| 10,922 |
| 10 | % |
| 17,137 |
| 14 | % |
| (6,215) |
| (36) | % | |
Energy Waste | 4,725 | 34 | % | 1,258 | 20 | % | 3,467 | 276 | % | |||||||
Corporate |
| (27,182) |
| n/m |
| (25,327) |
| n/m |
| (1,855) |
| 7 | % | |||
Total | $ | 29,883 |
| 12 | % | $ | 33,204 |
| 15 | % | $ | (3,321) |
| (10) | % | |
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 loss before interest expense, interest income, income tax expense/benefit, depreciation, amortization, share-based compensation, accretion of closure and post-closure liabilities, foreign currency gain/loss, business development and integration expenses and other income/expense. The reconciliation of Net loss to Adjusted EBITDA is as follows:
Adjusted EBITDA is a complement to results provided in accordance with GAAP and we believe that such information provides additional useful information to analysts, stockholders and other users to understand the Company’s operating 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.
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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, which may vary significantly from quarter to quarter. |
Revenue
Total revenue increased 5% to $241.0 million for the first quarter of 2022 compared with $228.6 million for the first quarter of 2021.
Waste Solutions
Waste Solutions segment revenue increased 10% to $114.8 million for the first quarter of 2022, compared to $104.1 million for the first quarter of 2021. T&D revenue increased 9% compared to the first quarter of 2021, primarily as a result of a 13% increase in Base Business revenue, partially offset by an 11% decrease in project-based Event Business revenue. Transportation and logistics service revenue increased 15% compared to the first quarter of 2021, primarily reflecting Event Business projects utilizing more of the Company’s transportation and logistics services. Total tons of waste disposed of or processed across all our facilities increased approximately 9% for the first quarter of 2022 compared to the first quarter of 2021. Tons of waste disposed of or processed at our landfills increased approximately 3% for the first quarter of 2022 compared to the first quarter of 2021.
T&D revenue from recurring Base Business waste generators increased 13% for the first quarter of 2022 compared to the first quarter of 2021 and comprised 80% of total T&D revenue for the first quarter of 2022. Comparing the first quarter of 2022 to the first quarter of 2021, increases in Base Business T&D revenue primarily from the chemical manufacturing, Other, metal manufacturing, broker/TSDF and general manufacturing industry groups were partially offset by decreases in Base Business T&D revenue from the mining, exploration & production and waste management & remediation industry groups.
T&D revenue from Event Business waste generators decreased 11% for the first quarter of 2022 compared to the first quarter of 2021 and comprised 20% of total T&D revenue for the first quarter of 2022. Comparing the first quarter of 2022 to the first quarter of 2021, decreases in Event Business T&D revenue primarily from the metal manufacturing, chemical manufacturing, waste management & remediation and utilities industry groups were partially offset by increases in Event Business T&D revenue from the general manufacturing, Other and government industry groups.
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The following table summarizes combined Base Business and Event Business T&D revenue growth, within the Waste Solutions segment, by generator industry for the first quarter of 2022 as compared to the first quarter of 2021:
Field Services
Field Services segment revenue decreased 5% to $112.3 million for the first quarter of 2022 compared with $118.2 million for the first quarter of 2021. The decrease in Field Services segment revenue is primarily attributable to lower revenues from our Remediation and Emergency Response business lines, partially offset by higher revenues from our Industrial Services, Small Quantity Generation, Transportation and Logistics and Treatment & Disposal business lines.
Energy Waste
Energy Waste segment revenue increased 123% to $13.9 million for the first quarter of 2022 compared with $6.2 million for the first quarter of 2021, primarily attributable to a partial recovery in energy markets and increases in energy-related exploration and production activities in the markets we serve.
Gross Profit
Total gross profit increased 1% to $53.4 million for the first quarter of 2022, up from $52.9 million for the first quarter of 2021. Total gross margin was 22% for the first quarter of 2022 compared with 23% for the first quarter of 2021.
Waste Solutions
Waste Solutions segment gross profit increased 9% to $38.1 million for the first quarter of 2022, up from $35.0 million for the first quarter of 2021. Total segment gross margin for the first quarter of 2022 was 33% compared with 34% for the first quarter of 2021. The decrease in segment gross margin was primarily attributable to higher employee labor and benefits costs in the first quarter of 2022 compared with the first quarter of 2021. T&D gross margin was 38% for the first quarter of 2022 compared with 37% for the first quarter of 2021.
Field Services
Field Services segment gross profit decreased 34% to $12.1 million for the first quarter of 2022, down from $18.3 million for the first quarter of 2021. Total segment gross margin was 11% for the first quarter of 2022 compared with 15% for the first quarter of 2021. The decrease in segment gross margin was primarily attributable to a less favorable service mix, higher employee labor and benefits costs as well as higher fuel and supplies expenses in the first quarter of 2022 compared with the first quarter of 2021.
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Energy Waste
Energy Waste segment gross profit was $3.2 million for the first quarter of 2022 compared to a gross loss of $383,000 for the first quarter of 2021. Total segment gross margin was 23% for the first quarter of 2022 compared with (6)% for the first quarter of 2021. The increase in segment gross margin was primarily attributable to improved operating leverage in the first quarter of 2022 compared with the first quarter of 2021.
Selling, General and Administrative Expenses (“SG&A”)
Total SG&A increased 12% to $57.3 million, or 24% of total revenue, for the first quarter of 2022, up from $51.4 million, or 22% of total revenue, for the first quarter of 2021.
Waste Solutions
Waste Solutions segment SG&A increased 10% to $6.9 million, or 6% of segment revenue, for the first quarter of 2022 compared with $6.3 million, or 6% of segment revenue, for the first quarter of 2021. The increase in segment SG&A was primarily attributable to higher employee labor and benefits costs, higher insurance costs and higher bad debt expense, partially offset by higher gains on disposition of assets in the first quarter of 2022 compared to the first quarter of 2021.
Field Services
Field Services segment SG&A decreased 6% to $11.9 million, or 11% of segment revenue, for the first quarter of 2022 compared with $12.7 million, or 11% of segment revenue, for the first quarter of 2021. The decrease in segment SG&A was primarily attributable to lower intangible asset amortization expense and lower insurance costs, partially offset by higher employee labor and benefits costs and lower gains on disposition of assets in the first quarter of 2022 compared to the first quarter of 2021.
Energy Waste
Energy Waste segment SG&A decreased 14% to $2.9 million, or 21% of segment revenue, for the first quarter of 2022 compared with $3.3 million, or 54% of segment revenue, for the first quarter of 2021. The decrease in segment SG&A was primarily attributable to lower intangible asset amortization expense, lower bad debt expense and higher gains on disposition of assets in the first quarter of 2022 compared to the first quarter of 2021.
Corporate
Corporate SG&A increased 23% to $35.6 million, or 15% of total revenue, for the first quarter of 2022 compared with $29.0 million, or 13% of total revenue, for the first quarter of 2021. The increase in Corporate SG&A primarily reflects higher business development and integration expenses and higher employee labor and benefits costs, partially offset by lower professional services expenses in the first quarter of 2022 compared to the first quarter of 2021.
Components of Adjusted EBITDA
Income tax benefit
Income tax benefit for the first quarter of 2022 was $2.0 million, resulting in a consolidated effective income tax rate of 18.2%. Income tax benefit for the first quarter of 2021 was $1.4 million, resulting in a consolidated effective income tax rate of 64.5%. We used a discrete effective tax rate method to calculate taxes for the three months ended March 31, 2022. For additional information on our consolidated effective income tax rate, see Note 12 of the Notes to Consolidated Financial Statements in “Part I, Item 1. Financial Statements (Unaudited)” of this Quarterly Report on Form 10-Q.
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Interest expense
Interest expense was $6.8 million for the first quarter of 2022 compared with $7.4 million for the first quarter of 2021. The decrease is primarily the result of lower outstanding debt levels and lower interest expense amortization related to terminated swap agreements, partially offset by the impact of higher interest rates on the variable portion of our outstanding debt in the first quarter of 2022 compared to the first quarter of 2021.
Foreign currency loss
We recognized a $698,000 foreign currency loss for the first quarter of 2022 compared with a $371,000 foreign currency loss for the first quarter of 2021. Foreign currency gains and losses reflect changes in business activity conducted in a currency other than the U.S. dollar (“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 March 31, 2022, we had $7.8 million of intercompany loans subject to currency revaluation.
Other income
Other income was $177,000 for the first quarter of 2022 compared with other income of $3.7 million for the first quarter of 2021. In the first quarter of 2021, the company recognized a gain of $3.5 million related to the change in the fair value of a minority interest investment.
Depreciation and amortization of plant and equipment
Depreciation and amortization expense decreased 7% to $16.9 million for the first quarter of 2022 compared with $18.2 million for the first quarter of 2021.
Amortization of intangible assets
Intangible assets amortization expense decreased 14% to $7.9 million for the first quarter of 2022 compared with $9.1 million for the first quarter of 2021, primarily reflecting the full amortization of certain intangible assets in 2021.
Share-based compensation
Share-based compensation expense was a $1.9 million for both the first quarter of 2022 and 2021.
Accretion and non-cash adjustment of closure and post-closure liabilities
Accretion and non-cash adjustment of closure and post-closure liabilities was $1.2 million for both the first quarter of 2022 and 2021.
Business development and integration expenses
Business development and integration expenses increased 380% to $5.9 million in the first quarter of 2022, compared to $1.2 million in the first quarter of 2021, primarily attributable to higher business development expenses related to the Merger in the first quarter of 2022.
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
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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, 2021.
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 remains uncertain, we believe that we have sufficient cash flow from operations and available borrowings under the Revolving Credit Facility to execute our business strategy in the short and longer term, even if the Merger is not consummated. While management continues to closely monitor the impact of the COVID-19 pandemic, including the spread of new variants of the virus and government and private sector responses to it in each of the locations and sectors in which the Company does business, we believe that the Company’s strategy during the pandemic has increased the Company’s resiliency and positioned the Company to take advantage of any post-pandemic recovery.
Our primary sources of liquidity are cash and cash equivalents, cash generated from operations and borrowings under the Credit Agreement. At March 31, 2022, we had $74.2 million in unrestricted cash and cash equivalents immediately available and $27.7 million of borrowing capacity, subject to our leverage covenant limitation, 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 that even if the Merger is not consummated we will have sufficient cash for the next twelve months of operations. Furthermore, existing cash balances and availability of additional borrowings under the Credit Agreement provide additional sources of liquidity should they be required. On June 29, 2021, Predecessor US Ecology amended the Credit Agreement to extend the maturity date for the existing revolving credit facility to June 29, 2026. The Credit Agreement was also amended to extend the existing covenant relief period to end on the earlier of December 31, 2022 and the date Predecessor US Ecology elects to end such covenant relief period pursuant to the terms therein and to permanently increase Predecessor US Ecology’s consolidated total net leverage ratio requirement as of the end of each fiscal quarter ending on and after December 31, 2022 to 4.50 to 1.00. See additional information on the Fourth Amendment under “Amendments to the Credit Agreement,” below.
Operating Activities
For the three months ended March 31, 2022, net cash provided by operating activities was $22.1 million. This primarily reflects net loss of $9.0 million, non-cash depreciation, amortization and accretion of $26.0 million, a decrease in income taxes receivable of $6.5 million, an increase deferred revenue of $3.9 million, a decrease in accounts receivable of $3.9 million and share-based compensation expense of $1.9 million, partially offset by a decrease in accounts payable and accrued liabilities of $4.2 million, deferred incomes taxes of $3.5 million and a decrease in accrued salaries and benefits of $3.4 million. Impacts on net income are due to the factors discussed above under “Results of Operations.” The decrease in income taxes receivable is primarily attributable to the timing of prior year income tax refund claims received and current year income tax payments. 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. 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 2021 financial performance.
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 84 days as of March 31, 2022, compared to 84 days as of December 31, 2021, and 85 days as of March 31, 2021.
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For the three months ended March 31, 2021, net cash provided by operating activities was $19.5 million. This primarily reflects net loss of $796,000, non-cash depreciation, amortization and accretion of $28.6 million, an increase in deferred revenue of $2.2 million and share-based compensation expense of $1.9 million, partially offset by deferred incomes taxes of $3.8 million, a decrease in accounts payable and accrued liabilities of $3.6 million, a gain of $3.5 million related to a change in the fair value of a minority interest investment and a decrease in accrued salaries and benefits of $3.0 million. Impacts on net income are due to the factors discussed above under “Results of Operations.” 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. Changes in accounts payable and accrued liabilities are attributable to the timing of 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 2020 financial performance.
Investing Activities
For the three months ended March 31, 2022, net cash used in investing activities was $13.8 million, primarily related to capital expenditures of $16.2 million, partially offset by $1.9 million in proceeds from the sale of short-term investments. Capital projects consisted primarily of landfill cell development and infrastructure upgrades at our operating facilities.
For the three months ended March 31, 2021, net cash used in investing activities was $8.7 million, primarily related to capital expenditures of $9.6 million and a $712,000 investment in the preferred stock of a privately held company, partially offset by $1.6 million in proceeds from the sale of property and equipment. Capital projects consisted primarily of infrastructure upgrades at our operating facilities and landfill cell development.
Financing Activities
For the three months ended March 31, 2022, net cash used in financing activities was $2.4 million, consisting primarily of $1.2 million in payments on our equipment financing obligations and a $1.1 million quarterly payment on our term loan.
For the three months ended March 31, 2021, net cash used in financing activities was $2.8 million, consisting primarily of $1.5 million in payments on our equipment financing obligations and a $1.1 million quarterly payment on our term loan.
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 the Credit Agreement that provides for a $500.0 million 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 herein, the Credit Agreement was amended in August and November 2019 in connection with the NRC Merger; and further amended on June 26, 2020 and June 29, 2021 pursuant to the Third Amendment and Fourth Amendment (each as defined herein), respectively.
During the three months ended March 31, 2022, 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 3.94%. 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 $430.0 million, or approximately 58%, of the Revolving Credit Facility and term loan borrowings outstanding as of March 31, 2022.
As modified by the Fourth Amendment as described herein, 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). The maximum letter of credit capacity under the Revolving Credit Facility is $75.0 million and the Credit Agreement
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provides for a letter of credit fee equal to the applicable margin for LIBOR loans under the Revolving Credit Facility. At March 31, 2022, there were $303.0 million of revolving credit loans outstanding on the Revolving Credit Facility. These revolving credit loans are due on June 29, 2026 (or such earlier date as the revolving credit facility may otherwise terminate pursuant to the terms of the Credit Agreement) 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 March 31, 2022, there were no borrowings outstanding subject to the Sweep Arrangement.
As of March 31, 2022, the availability under the Revolving Credit Facility was $27.7 million, subject to our leverage covenant limitation, with $12.2 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. It is currently expected that all outstanding borrowings under the Credit Agreement will be repaid and the Credit Agreement will be terminated in connection with the consummation of the Merger.
Amendments to the Credit Agreement
On August 6, 2019, Predecessor US Ecology entered into the First Amendment (as defined herein). 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 (as defined in the credit agreement) 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 Second Amendment (as defined herein). 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 three months ended March 31, 2022, the effective interest rate on the term loan, including the impact of the amortization of debt issuance costs, was 2.91%.
On June 26, 2020, Predecessor US Ecology entered into the Third Amendment. 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 EBITDA (as defined in the Credit Agreement).
On June 29, 2021, Predecessor US Ecology entered into the Fourth Amendment. Among other things, the Fourth Amendment amends the Credit Agreement to extend the maturity date for the existing revolving credit facility to June 29,
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2026 (or such earlier date as the revolving credit facility may otherwise terminate pursuant to the terms of the Credit Agreement). The Fourth Amendment also amends the Credit Agreement (i) to extend the existing covenant relief period to end on the earlier of December 31, 2022 and the date Predecessor US Ecology elects to end such covenant relief period pursuant to the terms therein and (ii) to permanently increase Predecessor US Ecology’s consolidated total net leverage ratio requirement as of the end of each fiscal quarter ending on and after December 31, 2022 to 4.50 to 1.00. During the covenant relief period until the fiscal quarter ending December 31, 2022, the Fourth Amendment increases Predecessor US Ecology’s consolidated total net leverage ratio requirement as of the end of each fiscal quarter to certain ratios above the 4.50 to 1.00 ratio otherwise in effect after giving effect to the Fourth Amendment, subject to compliance with certain restrictions on restricted payments and permitted acquisitions during such covenant relief period. Furthermore, after giving effect to the Fourth Amendment and whether or not the covenant relief period is in effect, (i) if the Borrower’s consolidated total net leverage ratio is equal to or greater than 4.00 to 1.00 but less than 4.50 to 1.00, the interest rate on all outstanding borrowings of revolving credit loans under the Credit Agreement will step-up to the LIBOR plus 2.25% or a base rate plus 1.25% and the commitment fee will step-up to 0.375% and (ii) if Predecessor US Ecology’s consolidated total net leverage ratio is greater than 4.50 to 1.00, the interest rate on all outstanding borrowings of revolving credit loans under the Credit Agreement will step-up to LIBOR plus 2.50% or a base rate plus 1.50% and the commitment fee will step-up to 0.40%, in each case, pursuant to the terms of the Credit Agreement. The Fourth Amendment also reset any outstanding usage of certain negative covenant baskets, including baskets in connection with the indebtedness, liens, investments, asset dispositions, restricted payments and affiliate transactions negative covenants.
For additional information see Note 10 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 $430.0 million, or approximately 58%, of the Revolving Credit Facility and term loan borrowings outstanding as of March 31, 2022. 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 10 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 three months ended March 31, 2022. 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, 2021.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
We do not maintain equities, commodities, derivatives, or any other similar instruments for trading purposes. We have minimal interest rate risk on investments or other assets due to our preservation of capital approach to investments. At March 31, 2022, $1.6 million of restricted cash and investments and cash and cash equivalents were invested in 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 EBITDA (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).
In March 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
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swap, the Company pays interest at the fixed effective rate of 0.83% and receives interest at the variable one-month LIBOR rate on an initial notional amount of $500.0 million.
As of March 31, 2022, there were $303.0 million of Revolving Credit Facility loans, and $439.9 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.
Based on the outstanding indebtedness under the Credit Agreement on March 31, 2022 and the impact of our interest rate hedge, if market rates used to calculate interest expense were to average 1% higher in the next twelve months, our interest expense would increase by approximately $2.4 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 three months ended March 31, 2022, we recorded approximately $18.2 million, or 8%, of our revenue in Canada, $6.3 million, or 3%, 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 March 31, 2022, we had $7.8 million of intercompany loans outstanding between our Canadian subsidiaries and US Ecology. During the three months ended March 31, 2022, the CAD strengthened as compared to the USD resulting in a $119,000 non-cash foreign currency translation gain being recognized in the Company’s consolidated statements of operations related to the intercompany loans. Based on intercompany balances as of March 31, 2022, a $0.01 CAD increase or decrease in currency rate compared to the USD at March 31, 2022 would have generated a gain or loss of approximately $78,000 for the three months ended March 31, 2022.
We had a total pre-tax foreign currency loss of $698,000 for the three months ended March 31, 2022. 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 March 31, 2022. 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
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as appropriate to allow timely decisions regarding required disclosure, are effective to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the rules and forms of the SEC.
There were no changes in our internal control over financial reporting that occurred during the most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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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, the impact on our business of the Merger and our ability to complete the Merger in a timely manner, expansion of service offerings geographically or through new or expanded service lines, the timing and cost of planned capital expenditures, competitive conditions, and general economic conditions. These assumptions could prove inaccurate. Forward-looking statements also involve known and unknown risks and uncertainties, which could cause actual results to differ materially from those contained in any forward-looking statement. Many of these factors are beyond our ability to control or predict. Such factors include developments related to the COVID-19 pandemic, fluctuations in commodity markets related to our business, 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 the London Interbank Offered Rate (“LIBOR”) or the replacement thereto, risks associated with our international operations, the impact of changes to U.S. tariff and import and export regulations, a change in our classification as an Oil Spill Removal Organization, cyber security threats, unanticipated changes in tax rules and regulations, loss of key personnel, a deterioration in our labor relations or labor disputes, our reliance on 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, 2021 and in other reports we file with the SEC could harm our business, prospects, operating results, and financial condition and the following factors:
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| ● | In order to complete the Merger, the Company and Republic Services, Inc. must obtain certain governmental approvals, and if such approvals are not granted or are granted with conditions, completion of the Merger may be jeopardized or the anticipated benefits of the Merger could be reduced; |
| ● | the effect of limitations that the Merger Agreement places on US Ecology’s ability to operate its business, return capital to stockholders or engage in alternative transactions; |
| ● | the nature, cost and outcome of pending and future litigation and other legal proceedings, including any such proceedings related to the Merger and instituted against the Company and others; |
| ● | the risk that the Merger and related transactions may involve unexpected costs, liabilities or delays; and |
| ● | other economic, business, competitive, legal, regulatory, and/or tax factors. |
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
Information with respect to this item may be found in Note 15 of the Notes to Consolidated Financial Statements in “Part I, Item 1. Financial Statements (Unaudited)” of this Quarterly Report on Form 10-Q, under the caption “Litigation and Regulatory Proceedings” which information is incorporated herein by reference.
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 “Item 1A – Risk Factors” of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On June 6, 2020, the Company’s Board of Directors’ authorization 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.
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The following table summarizes the purchases of shares of our common stock during the three months ended March 31, 2022:
|
|
| 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, 2022 (1) |
| 379 | $ | 31.89 |
| — | $ | — | ||
February 1 to 28, 2022 |
| — |
| — |
| — |
| — | ||
March 1 to 31, 2022 |
| — |
| — |
| — |
| — | ||
Total |
| 379 | $ | 31.89 |
| — | $ | — | ||
| (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.
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 March 31, 2022 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 March 31, 2022, 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: April 29, 2022 | /s/ Eric L. Gerratt |
Eric L. Gerratt | |
Executive Vice President, Chief Financial Officer and Treasurer |
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