Sweep Arrangement are subject to the $25.0 million swingline loan sublimit under the Revolving Credit Facility. The Company’s revolving credit loans outstanding under the Revolving Credit Agreement are not subject to repayment through the Sweep Arrangement. As of June 30, 2017, there were no amounts outstanding subject to the Sweep Arrangement.
As of June 30, 2017, the availability under the Revolving Credit Facility was $216.7 million with $6.3 million of the Revolving Credit Facility issued in the form of standby letters of credit utilized as collateral for closure and post-closure financial assurance and other assurance obligations.
The Company may at any time and from time to time prepay revolving credit loans and swingline loans, in whole or in part, without premium or penalty, subject to the obligation to indemnify each of the lenders against any actual loss or expense (including any loss or expense arising from the liquidation or reemployment of funds obtained by it to maintain a LIBOR rate loan (as defined in the New Credit Agreement) or from fees payable to terminate the deposits from which such funds were obtained) with respect to the early termination of any LIBOR rate loan. The New Credit Agreement provides for mandatory prepayment at any time if the revolving credit outstandings exceed the revolving credit commitment (as such terms are defined in the New Credit Agreement), in an amount equal to such excess. Subject to certain exceptions, the New Credit Agreement provides for mandatory prepayment upon certain asset dispositions, casualty events and issuances of indebtedness.
Pursuant to (i) an unconditional guarantee agreement and (ii) a collateral agreement, each entered into by the Company and its domestic subsidiaries on April 18, 2017, the Company’s obligations under the New Credit Agreement are (or will be) jointly and severally and fully and unconditionally guaranteed on a senior basis by all of the Company’s existing and certain future domestic subsidiaries and are secured by substantially all of the assets of the Company and the Company’s existing and certain future domestic subsidiaries (subject to certain exclusions), including 100% of the equity interests of the Company’s domestic subsidiaries and 65% of the voting equity interests of the Company’s directly owned foreign subsidiaries (and 100% of the non-voting equity interests of the Company’s directly owned foreign subsidiaries).
The New Credit Agreement contains customary restrictive covenants, subject to certain permitted amounts and exceptions, including covenants limiting the ability of the Company to incur additional indebtedness, pay dividends and make other restricted payments, repurchase shares of our outstanding stock and create certain liens. Upon the occurrence of an event of default (as defined in the New Credit Agreement), among other things, amounts outstanding under the New Credit Agreement may be accelerated and the commitments may be terminated.
The New Credit Agreement also contains financial maintenance covenants, a maximum consolidated total net leverage ratio and a consolidated interest coverage ratio (as such terms are defined in the New Credit Agreement). Our consolidated total net leverage ratio as of the last day of any fiscal quarter, commencing with the fiscal quarter ending June 30, 2017, may not exceed 3.50 to 1.00, subject to certain exceptions. Our consolidated interest coverage ratio as of the last day of any fiscal quarter, commencing with the fiscal quarter ending June 30, 2017, may not be less than 3.00 to 1.00.
At June 30, 2017, we were in compliance with all of the financial covenants in the New Credit Agreement.
Former Credit Agreement
On June 17, 2014, the Company entered into a $540.0 million senior secured credit agreement (the “Former Credit Agreement”) with a syndicate of banks comprised of a $415.0 million term loan (the “Former Term Loan”) with a maturity date of June 17, 2021 and a $125.0 million revolving line of credit (the “Former Revolving Credit Facility”) with a maturity date of June 17, 2019.
The Former Term Loan provided an initial commitment amount of $415.0 million and bore interest at a base rate (as defined in the Former Credit Agreement) plus 2.00% or LIBOR plus 3.00%, at the Company’s option.
The Former Revolving Credit Facility provided up to $125.0 million of revolving credit loans or letters of credit with the use of proceeds restricted solely for working capital and other general corporate purposes. Under the Former Revolving Credit Facility, revolving loans were available based on a base rate (as defined in the Former Credit Agreement) or LIBOR, at the Company’s option, plus an applicable margin which was determined according to a pricing grid under which the
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information contained in this section should be read in conjunction with our unaudited consolidated financial statements and related notes thereto appearing elsewhere in this quarterly report on Form 10-Q. In this report words such as “we,” “us,” “our,” “US Ecology” and the “Company” refer to US Ecology, Inc. and its subsidiaries.
OVERVIEW
US Ecology, Inc. is a leading North American provider of environmental services to commercial and government entities. The Company addresses the complex waste management needs of its customers, offering treatment, disposal and recycling of hazardous, non-hazardous and radioactive waste, as well as a wide range of complementary field and industrial services. US Ecology’s comprehensive knowledge of the waste business, its collection of waste management facilities and focus on safety, environmental compliance, and customer service enables us to effectively meet the needs of our customers and to build long-lasting relationships.
We have fixed facilities and service centers operating in the United States, Canada and Mexico. Our fixed facilities include five Resource Conservation and Recovery Act of 1976, subtitle C, hazardous waste landfills and one low-level radioactive waste landfill located near Beatty, Nevada; Richland, Washington; Robstown, Texas; Grand View, Idaho; Detroit, Michigan and Blainville, Québec, Canada. These facilities generate revenue from fees charged to treat and dispose of waste and from fees charged to perform various field and industrial services for our customers.
Our operations are managed in two reportable segments reflecting our internal management reporting structure and nature of services offered as follows:
Environmental Services
- This segment provides a broad range of hazardous material management services including transportation, recycling, treatment and disposal of hazardous and non-hazardous waste at Company-owned landfill, wastewater and other treatment facilities.
Field & Industrial Services
- This segment provides packaging and collection of hazardous waste and total waste management solutions at customer sites and through our 10-day transfer facilities. Services include on-site management, waste characterization, transportation and disposal of non-hazardous and hazardous waste. This segment also provides specialty services such as high-pressure cleaning, tank cleaning, decontamination, remediation, transportation, spill cleanup and emergency response and other services to commercial and industrial facilities and to government entities.
In order to provide insight into the underlying drivers of our waste volumes and related treatment and disposal (“T&D”) revenues, we evaluate period-to-period changes in our T&D revenue for our Environmental Services segment based on the industry of the waste
generator
, based on North American Industry Classification System (“NAICS”) codes. The
composition of Environmental Services segment T&D revenues by waste generator industry for the three and six months ended June 30, 2017 and 2016 were as follows:
|
|
|
|
|
|
|
% of Treatment and Disposal Revenue (1) for the
|
|
|
Three Months Ended June 30,
|
Generator Industry
|
|
2017
|
|
2016
|
Metal Manufacturing
|
|
17%
|
|
17%
|
Chemical Manufacturing
|
|
15%
|
|
13%
|
Broker / TSDF
|
|
12%
|
|
15%
|
General Manufacturing
|
|
12%
|
|
14%
|
Refining
|
|
10%
|
|
10%
|
Government
|
|
6%
|
|
6%
|
Utilities
|
|
4%
|
|
5%
|
Transportation
|
|
3%
|
|
2%
|
Mining, Exploration and Production
|
|
2%
|
|
3%
|
Waste Management & Remediation
|
|
2%
|
|
2%
|
Other(2)
|
|
17%
|
|
13%
|
|
(1)
|
|
Excludes all transportation service revenue
|
|
(2)
|
|
Includes retail and wholesale trade, rate regulated, construction and other industries
|
|
|
|
|
|
|
|
% of Treatment and Disposal Revenue (1) for the
|
|
|
Six Months Ended June 30,
|
Generator Industry
|
|
2017
|
|
2016
|
Metal Manufacturing
|
|
16%
|
|
17%
|
Broker / TSDF
|
|
14%
|
|
15%
|
Chemical Manufacturing
|
|
13%
|
|
13%
|
General Manufacturing
|
|
13%
|
|
13%
|
Refining
|
|
12%
|
|
11%
|
Government
|
|
6%
|
|
6%
|
Utilities
|
|
4%
|
|
5%
|
Mining, Exploration and Production
|
|
2%
|
|
3%
|
Transportation
|
|
2%
|
|
3%
|
Waste Management & Remediation
|
|
2%
|
|
2%
|
Other(2)
|
|
16%
|
|
12%
|
(1)
Excludes all transportation service revenue
(2)
Includes retail and wholesale trade, rate regulated, construction and other industries
We also categorize our Environmental Services T&D revenue as either “Base Business” or “Event Business” based on the underlying nature of the revenue source. 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.
A significant portion of our disposal revenue is attributable to discrete Event Business projects which vary widely in size, duration and unit pricing. For the three months ended June 30, 2017, approximately 23% of our T&D revenue was derived from Event Business projects, up from 20% for the three months ended June 30, 2016. For the three months ended June 30, 2017, Event Business revenue increased 24% compared to the three months ended June 30, 2016. For the six months ended June 30, 2017, approximately 19% of our T&D revenue was derived from Event Business projects, consistent with 19% for the six months ended June 30, 2016. For the six months ended June 30, 2017, Event Business revenue increased 7% compared to the six months ended June 30, 2016. 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 cause significant
quarter-to-quarter and year-to-year differences in revenue, gross profit, gross margin, operating income and net income. Also, while we pursue many large projects months or years in advance of work performance, both large and small 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.
For the three months ended June 30, 2017, Base Business revenue increased 3% compared to the three months ended June 30, 2016. Base Business revenue was approximately 77% of total T&D revenue for the three months ended June 30, 2017, down from 80% for the three months ended June 30, 2016. For the six months ended June 30, 2017, Base Business revenue increased 3% compared to the six months ended June 30, 2016. Base Business revenue was approximately 81% of total T&D revenue for the six months ended June 30, 2017, consistent with 81% for the six months ended June 30, 2016. Our business is highly competitive and no assurance can be given that we will maintain these revenue levels or increase our market share.
Depending on project-specific customer needs and competitive economics, transportation services may be offered at or near our cost to help secure new business. For waste transported by rail from the eastern United States and other locations distant from our Grand View, Idaho and Robstown, Texas facilities, transportation-related revenue can account for as much as 75% of total project revenue. While bundling transportation and disposal services reduces overall gross profit as a percentage of total revenue (“gross margin”), this value-added service has allowed us to win multiple projects that management believes we could not have otherwise competed for successfully. Our Company-owned fleet of gondola railcars, which is periodically supplemented with railcars obtained under operating leases, has reduced our transportation expenses by largely eliminating reliance on more costly short-term rentals. These Company-owned railcars also help us to win business during times of demand-driven railcar scarcity.
The increased waste volumes resulting from projects won through this bundling service strategy further drive the operating leverage benefits inherent to the disposal business, increasing profitability. While waste treatment and other variable costs are project-specific, the incremental earnings contribution from large and small projects generally increases as overall disposal volumes increase. Based on past experience, management believes that maximizing operating income, net income and earnings per share is a higher priority than maintaining or increasing gross margin. We intend to continue aggressively bidding bundled transportation and disposal services based on this proven strategy.
We serve oil refineries, chemical production plants, steel mills, waste brokers/aggregators serving small manufacturers and other industrial customers that are generally affected by the prevailing economic conditions and credit environment. Adverse conditions may cause our customers as well as those they serve to curtail operations, resulting in lower waste production and/or delayed spending on off-site waste shipments, maintenance, waste cleanup projects and other work. Factors that can impact general economic conditions and the level of spending by customers include, but are not limited to, consumer and industrial spending, increases in fuel and energy costs, conditions in the real estate and mortgage markets, labor and healthcare costs, access to credit, consumer confidence and other global economic factors affecting spending behavior. Market forces may also induce customers to reduce or cease operations, declare bankruptcy, liquidate or relocate to other countries, any of which could adversely affect our business. To the extent business is either government funded or driven by government regulations or enforcement actions, we believe it is less susceptible to general economic conditions. Spending by government agencies may also be reduced due to declining tax revenues resulting from a weak economy or changes in policy. Disbursement of funds appropriated by Congress may also be delayed for various reasons.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2017 COMPARED TO THREE MONTHS ENDED JUNE 30, 2016
Operating results and percentage of revenues were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
2017 vs. 2016
|
|
$s in thousands
|
|
2017
|
|
%
|
|
2016
|
|
%
|
|
$ Change
|
|
% Change
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Environmental Services
|
|
$
|
89,591
|
|
71
|
%
|
$
|
82,797
|
|
68
|
%
|
$
|
6,794
|
|
8
|
%
|
Field & Industrial Services
|
|
|
36,466
|
|
29
|
%
|
|
39,554
|
|
32
|
%
|
|
(3,088)
|
|
(8)
|
%
|
Total
|
|
|
126,057
|
|
100
|
%
|
|
122,351
|
|
100
|
%
|
|
3,706
|
|
3
|
%
|
Gross Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Environmental Services
|
|
|
30,673
|
|
34
|
%
|
|
30,595
|
|
37
|
%
|
|
78
|
|
0
|
%
|
Field & Industrial Services
|
|
|
5,223
|
|
14
|
%
|
|
6,311
|
|
16
|
%
|
|
(1,088)
|
|
(17)
|
%
|
Total
|
|
|
35,896
|
|
28
|
%
|
|
36,906
|
|
30
|
%
|
|
(1,010)
|
|
(3)
|
%
|
Selling, General & Administrative Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Environmental Services
|
|
|
5,260
|
|
6
|
%
|
|
5,538
|
|
7
|
%
|
|
(278)
|
|
(5)
|
%
|
Field & Industrial Services
|
|
|
2,628
|
|
7
|
%
|
|
2,621
|
|
7
|
%
|
|
7
|
|
0
|
%
|
Corporate
|
|
|
12,112
|
|
n/m
|
|
|
11,660
|
|
n/m
|
|
|
452
|
|
4
|
%
|
Total
|
|
|
20,000
|
|
16
|
%
|
|
19,819
|
|
16
|
%
|
|
181
|
|
1
|
%
|
Adjusted EBITDA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Environmental Services
|
|
|
34,642
|
|
39
|
%
|
|
33,551
|
|
41
|
%
|
|
1,091
|
|
3
|
%
|
Field & Industrial Services
|
|
|
4,119
|
|
11
|
%
|
|
5,123
|
|
13
|
%
|
|
(1,004)
|
|
(20)
|
%
|
Corporate
|
|
|
(11,138)
|
|
n/m
|
|
|
(10,931)
|
|
n/m
|
|
|
(207)
|
|
2
|
%
|
Total
|
|
$
|
27,623
|
|
22
|
%
|
$
|
27,743
|
|
23
|
%
|
$
|
(120)
|
|
(0)
|
%
|
Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization (“Adjusted EBITDA”)
The primary financial measure used by management to assess segment performance is Adjusted EBITDA. Adjusted EBITDA is defined as net income before interest expense, interest income, income tax expense, depreciation, amortization, stock-based compensation, accretion of closure and post-closure liabilities, foreign currency gain/loss and other income/expense. The reconciliation of Net Income to Adjusted EBITDA is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
2017 vs. 2016
|
|
$s in thousands
|
|
2017
|
|
2016
|
|
$ Change
|
|
% Change
|
|
Net Income
|
|
$
|
5,049
|
|
$
|
8,938
|
|
$
|
(3,889)
|
|
(44)
|
%
|
Income tax expense
|
|
|
2,718
|
|
|
5,866
|
|
|
(3,148)
|
|
(54)
|
%
|
Interest expense
|
|
|
8,474
|
|
|
4,303
|
|
|
4,171
|
|
97
|
%
|
Interest income
|
|
|
(21)
|
|
|
(33)
|
|
|
12
|
|
(36)
|
%
|
Foreign currency (gain) loss
|
|
|
(158)
|
|
|
343
|
|
|
(501)
|
|
(146)
|
%
|
Other income
|
|
|
(166)
|
|
|
(2,330)
|
|
|
2,164
|
|
(93)
|
%
|
Depreciation and amortization of plant and equipment
|
|
|
6,987
|
|
|
6,202
|
|
|
785
|
|
13
|
%
|
Amortization of intangibles
|
|
|
2,615
|
|
|
2,646
|
|
|
(31)
|
|
(1)
|
%
|
Stock‑based compensation
|
|
|
1,043
|
|
|
783
|
|
|
260
|
|
33
|
%
|
Accretion and non‑cash adjustment of closure and post‑closure liabilities
|
|
|
1,082
|
|
|
1,025
|
|
|
57
|
|
6
|
%
|
Adjusted EBITDA
|
|
$
|
27,623
|
|
$
|
27,743
|
|
$
|
(120)
|
|
(0)
|
%
|
Adjusted EBITDA is a complement to results provided in accordance with accounting principles generally accepted in the United States (“GAAP”) and we believe that such information provides additional useful information to analysts, stockholders and other users to understand the Company’s operating performance. Since Adjusted EBITDA is not a measurement determined in accordance with GAAP and is thus susceptible to varying calculations, Adjusted EBITDA as presented may not be comparable to other similarly titled measures of other companies. Items excluded from Adjusted
EBITDA are significant components in understanding and assessing our financial performance. Adjusted EBITDA should not be considered in isolation or as an alternative to, or substitute for, net income, cash flows generated by operations, investing or financing activities, or other financial statement data presented in the consolidated financial statements as indicators of financial performance or liquidity.
Adjusted EBITDA has limitations as an analytical tool and should not be considered in isolation or a substitute for analyzing our results as reported under GAAP. Some of the limitations are:
|
·
|
|
Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;
|
|
·
|
|
Adjusted EBITDA does not reflect our interest expense, or the requirements necessary to service interest or principal payments on our debt;
|
|
·
|
|
Adjusted EBITDA does not reflect our income tax expenses or the cash requirements to pay our taxes;
|
|
·
|
|
Adjusted EBITDA does not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments; and
|
|
·
|
|
Although depreciation and amortization charges are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for such replacements.
|
Revenue
Total revenue increased 3% to $126.1 million for the second quarter of 2017 compared with $122.4 million for the second quarter of 2016.
Environmental Services
Environmental Services segment revenue increased 8% to $89.6 million for the second quarter of 2017 compared to $82.8 million for the second quarter of 2016. T&D revenue increased 6% compared to the second quarter of 2016, primarily as a result of a 24% increase in project-based Event Business revenue and a 3% increase in Base Business revenue. Transportation service revenue increased 15% compared to the second quarter of 2016, reflecting more Event Business projects utilizing the Company’s transportation and logistics services. Total tons of waste disposed of or processed across all of our facilities increased 5% for the second quarter of 2017 compared to the second quarter of 2016. Tons of waste disposed of or processed at our landfills increased 19% for the second quarter of 2017 compared to the second quarter of 2016.
T&D revenue from recurring Base Business waste generators increased 3% for the second quarter of 2017 compared to the second quarter of 2016 and comprised 77% of total T&D revenue for the second quarter of 2017. During the second quarter of 2017, increases in Base Business T&D revenue from the refining, metal manufacturing, and “Other” industry groups were partially offset by a decrease in Base Business T&D revenue from the broker/TSDF industry group.
T&D revenue from Event Business waste generators increased 24% for the second quarter of 2017 compared to the second quarter of 2016 and comprised 23% of total T&D revenue for the second quarter of 2017. During the second quarter of 2017, increases in Event Business T&D revenue from the “Other”, chemical manufacturing and government industry groups were partially offset by decreases in Event Business T&D revenue from the refining and general manufacturing industry groups.
The following table summarizes combined Base Business and Event Business T&D revenue growth, within the Environmental Services segment, by generator industry for the second quarter of 2017 as compared to the second quarter of 2016:
|
|
|
|
|
Treatment and Disposal Revenue Growth
|
|
|
Three Months Ended June 30, 2017 vs.
|
|
|
Three Months Ended June 30, 2016
|
Other
|
|
40%
|
Chemical Manufacturing
|
|
26%
|
Government
|
|
17%
|
Transportation
|
|
16%
|
Waste Management & Remediation
|
|
9%
|
Refining
|
|
7%
|
Metal Manufacturing
|
|
6%
|
Utilities
|
|
-8%
|
General Manufacturing
|
|
-10%
|
Broker / TSDF
|
|
-13%
|
Mining, Exploration & Production
|
|
-20%
|
Field & Industrial Services
Field & Industrial Services segment revenue decreased 8% to $36.5 million for the second quarter of 2017 compared with $39.6 million for the second quarter of 2016. The decrease in Field & Industrial Services segment revenue is primarily attributable to the expiration of a contract that was not renewed or replaced and softer overall market conditions for industrial and remediation services.
Gross Profit
Total gross profit decreased 3% to $35.9 million for the second quarter of 2017, down from $36.9 million for the second quarter of 2016. Total gross margin was 28% for the second quarter of 2017 compared with 30% for the second quarter of 2016.
Environmental Services
Environmental Services segment gross profit increased less than 1% to $30.7 million for the second quarter of 2017, up from $30.6 million for the second quarter of 2016. Total segment gross margin for the second quarter of 2017 was 34% compared with 37% for the second quarter of 2016. T&D gross margin was 38% for the second quarter of 2017 compared with 42% for the second quarter of 2016. The decrease in T&D gross margin primarily reflects the impact of the temporary closure of one of our treatment facilities during the second quarter of 2017 due to severe wind damage.
Field & Industrial Services
Field & Industrial Services segment gross profit decreased 17% to $5.2 million for the second quarter of 2017, down from $6.3 million for the second quarter of 2016. Total segment gross margin was 14% for the second quarter of 2017 compared with 16% for the second quarter of 2016. The decrease in segment gross margin is primarily attributable to lower revenue and a less favorable service mix in the second quarter of 2017 compared to the second quarter of 2016.
Selling, General and Administrative Expenses (“SG&A”)
Total SG&A was $20.0 million, or 16% of total revenue, for the second quarter of 2017 compared with $19.8 million, or 16% of total revenue, for the second quarter of 2016.
Environmental Services
Environmental Services segment SG&A decreased 5% to $5.3 million, or 6% of segment revenue, for the second quarter of 2017 compared with $5.5 million, or 7% of segment revenue, for the second quarter of 2016, primarily reflecting the recognition of insurance proceeds related to the repair of one of our treatment facilities, which suffered severe wind damage, partially offset by higher employee labor costs, higher professional services expenses and higher rental expenses in the second quarter of 2017 compared to the second quarter of 2016. We expect to recognize additional insurance proceeds in the second half of 2017 upon settlement of our business interruption insurance claim for lost profits during the period our treatment facility was temporarily closed.
Field & Industrial Services
Field & Industrial Services segment SG&A remained consistent at $2.6 million, or 7% of segment revenue, for the second quarter of 2017 compared with $2.6 million, or 7% of segment revenue, for the second quarter of 2016.
Corporate
Corporate SG&A was $12.1 million, or 10% of total revenue, for the second quarter of 2017 compared with $11.7 million, or 10% of total revenue, for the second quarter of 2016, primarily reflecting higher employee labor costs, partially offset by lower business development costs in the second quarter of 2017 compared with the second quarter of 2016.
Components of Adjusted EBITDA
Income tax expense
Our effective income tax rate for the second quarter of 2017 was 35.0% compared with 39.6% for the second quarter of 2016. The decrease primarily reflects a higher proportion of earnings from our Canadian operations, which are taxed at a lower corporate tax rate, in the second quarter of 2017 compared with the second quarter of 2016. The effective tax rate for the three months ended June 30, 2017 also reflects the impact of discrete events including the recognition of excess tax benefits related to employee stock compensation as a result of the adoption of Accounting Standards Update 2016-09.
Interest expense
Interest expense was $8.5 million for the second quarter of 2017 compared with $4.3 million for the second quarter of 2016. The Company wrote off certain unamortized deferred financing costs and original issue discount associated with the Former Credit Agreement that were to be amortized to interest expense in future periods through a one-time non-cash charge of $5.5 million to interest expense in the second quarter of 2017. This increase is partially offset by lower debt levels in the second quarter of 2017 compared to the second quarter of 2016, and a lower effective interest rate under the New Credit Agreement compared to the Former Credit Agreement.
Foreign currency gain (loss)
We recognized a $158,000 non-cash foreign currency gain for the second quarter of 2017 compared with a $343,000 non-cash foreign currency loss for the second quarter of 2016. Foreign currency gains and losses reflect changes in business activity conducted in a currency other than the United States dollar (“USD”), our functional currency. Additionally, we established intercompany loans between our Canadian subsidiaries, whose functional currency is the Canadian dollar (“CAD”), and our parent company, US Ecology, as part of a tax and treasury management strategy allowing for repayment of third-party bank debt. These intercompany loans are payable by our Canadian subsidiaries to US Ecology in CAD requiring us to revalue the outstanding loan balance through our statements of operations based on USD/CAD currency movements from period to period. At June 30, 2017, we had $18.8 million of intercompany loans subject to currency revaluation.
Other income
Other income for the second quarter of 2016 includes approximately $2.2 million related to the gain on sale of the Augusta, Georgia facility in April 2016 and final closing adjustments on the divestiture of our Allstate Power Vac, Inc. (“Allstate”) subsidiary to a private investor group recorded in the second quarter of 2016.
Depreciation and amortization of plant and equipment
Depreciation and amortization expense was $7.0 million for the second quarter of 2017 compared with $6.2 million for the second quarter of 2016.
Amortization of intangibles
Intangible assets amortization expense was $2.6 million for the second quarter of 2017 compared with $2.6 million for the second quarter of 2016.
Stock-based compensation
Stock-based compensation expense increased 33% to $1.0 million for the second quarter of 2017 compared with $783,000 for the second quarter of 2016 as a result of an increase in equity-based awards granted to employees.
Accretion and non-cash adjustment of closure and post-closure liabilities
Accretion and non-cash adjustment of closure and post-closure liabilities was $1.1 million for the second quarter of 2017 compared with $1.0 million for the second quarter of 2016.
SIX MONTHS ENDED JUNE 30, 2017 COMPARED TO SIX MONTHS ENDED JUNE 30, 2016
Operating results and percentage of revenues were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
2017 vs. 2016
|
|
$s in thousands
|
|
2017
|
|
%
|
|
2016
|
|
%
|
|
$ Change
|
|
% Change
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Environmental Services
|
|
$
|
170,894
|
|
72
|
%
|
$
|
164,321
|
|
70
|
%
|
$
|
6,573
|
|
4
|
%
|
Field & Industrial Services
|
|
|
65,397
|
|
28
|
%
|
|
71,348
|
|
30
|
%
|
|
(5,951)
|
|
(8)
|
%
|
Total
|
|
|
236,291
|
|
100
|
%
|
|
235,669
|
|
100
|
%
|
|
622
|
|
0
|
%
|
Gross Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Environmental Services
|
|
|
59,360
|
|
35
|
%
|
|
61,050
|
|
37
|
%
|
|
(1,690)
|
|
(3)
|
%
|
Field & Industrial Services
|
|
|
8,409
|
|
13
|
%
|
|
11,064
|
|
16
|
%
|
|
(2,655)
|
|
(24)
|
%
|
Total
|
|
|
67,769
|
|
29
|
%
|
|
72,114
|
|
31
|
%
|
|
(4,345)
|
|
(6)
|
%
|
Selling, General & Administrative Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Environmental Services
|
|
|
10,991
|
|
6
|
%
|
|
11,116
|
|
7
|
%
|
|
(125)
|
|
(1)
|
%
|
Field & Industrial Services
|
|
|
5,269
|
|
8
|
%
|
|
5,074
|
|
7
|
%
|
|
195
|
|
4
|
%
|
Corporate
|
|
|
23,454
|
|
n/m
|
|
|
23,054
|
|
n/m
|
|
|
400
|
|
2
|
%
|
Total
|
|
|
39,714
|
|
17
|
%
|
|
39,244
|
|
17
|
%
|
|
470
|
|
1
|
%
|
Adjusted EBITDA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Environmental Services
|
|
|
66,498
|
|
39
|
%
|
|
66,604
|
|
41
|
%
|
|
(106)
|
|
(0)
|
%
|
Field & Industrial Services
|
|
|
6,183
|
|
9
|
%
|
|
8,801
|
|
12
|
%
|
|
(2,618)
|
|
(30)
|
%
|
Corporate
|
|
|
(21,605)
|
|
n/m
|
|
|
(21,546)
|
|
n/m
|
|
|
(59)
|
|
0
|
%
|
Total
|
|
$
|
51,076
|
|
22
|
%
|
$
|
53,859
|
|
23
|
%
|
$
|
(2,783)
|
|
(5)
|
%
|
Adjusted EBITDA
As discussed above, the primary financial measure used by management to assess segment performance is Adjusted EBITDA. The reconciliation of Net Income to Adjusted EBITDA is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
2017 vs. 2016
|
|
$s in thousands
|
|
2017
|
|
2016
|
|
$ Change
|
|
% Change
|
|
Net Income
|
|
$
|
10,234
|
|
$
|
16,455
|
|
$
|
(6,221)
|
|
(38)
|
%
|
Income tax expense
|
|
|
5,797
|
|
|
10,550
|
|
|
(4,753)
|
|
(45)
|
%
|
Interest expense
|
|
|
12,604
|
|
|
8,862
|
|
|
3,742
|
|
42
|
%
|
Interest income
|
|
|
(31)
|
|
|
(82)
|
|
|
51
|
|
(62)
|
%
|
Foreign currency gain
|
|
|
(246)
|
|
|
(416)
|
|
|
170
|
|
(41)
|
%
|
Other income
|
|
|
(303)
|
|
|
(2,499)
|
|
|
2,196
|
|
(88)
|
%
|
Depreciation and amortization of plant and equipment
|
|
|
13,621
|
|
|
12,106
|
|
|
1,515
|
|
13
|
%
|
Amortization of intangibles
|
|
|
5,286
|
|
|
5,256
|
|
|
30
|
|
1
|
%
|
Stock‑based compensation
|
|
|
1,959
|
|
|
1,578
|
|
|
381
|
|
24
|
%
|
Accretion and non‑cash adjustment of closure and post‑closure liabilities
|
|
|
2,155
|
|
|
2,049
|
|
|
106
|
|
5
|
%
|
Adjusted EBITDA
|
|
$
|
51,076
|
|
$
|
53,859
|
|
$
|
(2,783)
|
|
(5)
|
%
|
Revenue
Total revenue increased less than 1% to $236.3 million for the first six months of 2017 compared with $235.7 million for the first six months of 2016.
Environmental Services
Environmental Services segment revenue increased 4% to $170.9 million for the first six months of 2017 compared to $164.3 million for the first six months of 2016. T&D revenue increased 5% compared to the first six months of 2016,
primarily as a result of a 7% increase in project-based Event Business revenue and a 3% increase in Base Business revenue. Transportation service revenue for the first six months of 2017 was consistent with the first six months of 2016. Total tons of waste disposed of, or processed, across all of our facilities increased 4% for the first six months of 2017 compared to the first six months of 2016. Tons of waste disposed of or processed at our landfills increased 9% for the first six months of 2017 compared to the first six months of 2016.
T&D revenue from recurring Base Business waste generators increased 3% for the first six months of 2017 compared to the first six months of 2016 and comprised 81% of total T&D revenue for the first six months of 2017. During the first six months of 2017, increases in Base Business T&D revenue from the refining, “Other” and metal manufacturing industry groups were partially offset by decreases in Base Business T&D revenue from the broker/TSDF and transportation industry groups.
T&D revenue from Event Business waste generators increased 7% for the first six months of 2017 compared to the first six months of 2016 and comprised 19% of total T&D revenue for the first six months of 2017. During the first six months of 2017, increases in Event Business T&D revenue from the “Other” and chemical manufacturing industry groups were partially offset by decreases in Event Business T&D revenue from the utilities and mining, exploration & production industry groups.
The following table summarizes combined Base Business and Event Business T&D revenue growth, within the Environmental Services segment, by generator industry for the first six months of 2017 as compared to the first six months of 2016:
|
|
|
|
|
|
Treatment and Disposal Revenue Growth
|
|
|
|
Six Months Ended June 30, 2017 vs.
|
|
|
|
Six Months Ended June 30, 2016
|
|
Other
|
|
22%
|
|
Refining
|
|
15%
|
|
Waste Management & Remediation
|
|
15%
|
|
Chemical Manufacturing
|
|
5%
|
|
General Manufacturing
|
|
5%
|
|
Government
|
|
4%
|
|
Metal Manufacturing
|
|
2%
|
|
Transportation
|
|
-6%
|
|
Broker / TSDF
|
|
-7%
|
|
Mining, Exploration & Production
|
|
-15%
|
|
Utilities
|
|
-19%
|
|
Field & Industrial Services
Field & Industrial Services segment revenue decreased 8% to $65.4 million for the first six months of 2017 compared with $71.4 million for the first six months of 2016. The decrease in Field & Industrial Services segment revenue is primarily attributable to the expiration of a contract that was not renewed or replaced and softer overall market conditions for industrial and remediation services.
Gross Profit
Total gross profit decreased 6% to $67.8 million for the first six months of 2017, down from $72.1 million for the first six months of 2016. Total gross margin was 29% for the first six months of 2017 compared with 31% for the first six months of 2016.
Environmental Services
Environmental Services segment gross profit decreased 3% to $59.4 million for the first six months of 2017, down from $61.1 million for the first six months of 2016. Total segment gross margin for the first six months of 2017 was 35% compared with 37% for the first six months of 2016. T&D gross margin was 38% for the first six months of 2017 compared
with 41% for the first six months of 2016. The decrease in T&D gross margin primarily reflects the impact of the temporarily closure of one of our treatment facilities due to severe wind damage as well as a less favorable service mix in the first six months of 2017 compared to the first six months of 2016.
Field & Industrial Services
Field & Industrial Services segment gross profit decreased 24% to $8.4 million for the first six months of 2017, down from $11.1 million for the first six months of 2016. Total segment gross margin was 13% for the first six months of 2017 compared with 16% for the first six months of 2016. The decrease in segment gross margin is primarily attributable to lower revenue and a less favorable service mix in the first six months of 2017 compared to the first six months of 2016.
Selling, General and Administrative Expenses (“SG&A”)
Total SG&A was $39.7 million, or 17% of total revenue, for the first six months of 2017 compared with $39.2 million, or 17% of total revenue, for the first six months of 2016.
Environmental Services
Environmental Services segment SG&A decreased 1% to $11.0 million, or 6% of segment revenue, for the first six months of 2017 compared with $11.1 million, or 7% of segment revenue, for the first six months of 2016, primarily reflecting the recognition of insurance proceeds related to the repair of one of our large treatment facilities, which suffered severe wind damage, partially offset by higher employee labor costs, higher professional services expenses, higher rental expenses and higher insurance costs in the first six months of 2017 compared to the first six months of 2016.
Field & Industrial Services
Field & Industrial Services segment SG&A increased 4% to $5.3 million, or 8% of segment revenue, for the first six months of 2017 compared with $5.1 million, or 7% of segment revenue, for the first six months of 2016. The increase in segment SG&A primarily reflects higher worker’s compensation costs and higher equipment and supplies expenses in the first six months of 2017 compared with the first six months of 2016.
Corporate
Corporate SG&A was $23.5 million, or 10% of total revenue, for the first six months of 2017 compared with $23.1 million, or 10% of total revenue, for the first six months of 2016, primarily reflecting higher employee labor costs, partially offset by lower business development costs in the first six months of 2017 compared with the first six months of 2016.
Components of Adjusted EBITDA
Income tax expense
Our effective income tax rate for the first six months of 2017 was 36.2% compared with 39.1% for the first six months of 2016. The decrease primarily reflects a higher proportion of earnings from our Canadian operations, which are taxed at a lower corporate tax rate, in the first six months of 2017 compared with the first six months of 2016. The effective tax rate for the six months ended June 30, 2017 also reflects the impact of discrete events including the recognition of excess tax benefits related to employee stock compensation as a result of the adoption of Accounting Standards Update 2016-09.
Interest expense
Interest expense was $12.6 million for the first six months of 2017 compared with $8.9 million for the first six months of 2016. The Company wrote off certain unamortized deferred financing costs and original issue discount associated with the Former Credit Agreement that were to be amortized to interest expense in future periods through a one-time non-cash charge of $5.5 million to interest expense in the second quarter of 2017. This increase is partially offset by lower debt
levels in the first six months of 2017 compared to the first six months of 2016, and a lower effective interest rate under the New Credit Agreement compared to the Former Credit Agreement.
Foreign currency gain (loss)
We recognized a $246,000 non-cash foreign currency gain for the first six months of 2017 compared with a $416,000 non-cash foreign currency gain for the first six months of 2016. Foreign currency gains and losses reflect changes in business activity conducted in a currency other than the USD, our functional currency. Additionally, we established intercompany loans between our Canadian subsidiaries, whose functional currency is the CAD, and our parent company, US Ecology, as part of a tax and treasury management strategy allowing for repayment of third-party bank debt. These intercompany loans are payable by our Canadian subsidiaries to US Ecology in CAD requiring us to revalue the outstanding loan balance through our statements of operations based on USD/CAD currency movements from period to period. At June 30, 2017, we had $18.8 million of intercompany loans subject to currency revaluation.
Other income
Other income for the first six months of 2016 includes approximately $2.2 million related to the gain on sale of the Augusta, Georgia facility in April 2016 and final closing adjustments on the Allstate divestiture recorded in the second quarter of 2016.
Depreciation and amortization of plant and equipment
Depreciation and amortization expense was $13.6 million for the first six months of 2017 compared with $12.1 million for the first six months of 2016.
Amortization of intangibles
Intangible assets amortization expense was $5.3 million for the first six months of 2017 compared with $5.3 million for the first six months of 2016.
Stock-based compensation
Stock-based compensation expense increased 24% to $2.0 million for the first six months of 2017 compared with $1.6 million for the first six months of 2016 as a result of an increase in equity-based awards granted to employees.
Accretion and non-cash adjustment of closure and post-closure liabilities
Accretion and non-cash adjustment of closure and post-closure liabilities was $2.2 million for the first six months of 2017 compared with $2.0 million for the first six months of 2016.
CRITICAL ACCOUNTING POLICIES
Financial statement preparation requires management to make estimates and judgments that affect reported assets, liabilities, revenue and expenses and disclosure of contingent assets and liabilities. The accompanying unaudited consolidated financial statements are prepared using the same critical accounting policies disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016.
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” of this Form 10-Q.
LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of liquidity are cash and cash equivalents, cash generated from operations and borrowings under the new senior secured credit agreement (the “New Credit Agreement”). At June 30, 2017, we had $4.9 million in cash and cash equivalents immediately available and $216.7 million of borrowing capacity available under our New Credit Agreement. We assess our liquidity in terms of our ability to generate cash to fund our operating, investing and financing activities. Our primary ongoing cash requirements are funding operations, capital expenditures, paying interest and required principal payments on our long-term debt, and paying declared dividends pursuant to our dividend policy. We believe future operating cash flows will be sufficient to meet our future operating, investing and dividend cash needs for the foreseeable future. Furthermore, existing cash balances and availability of additional borrowings under our New Credit Agreement provide additional sources of liquidity should they be required.
Operating Activities
For the six months ended June 30, 2017, net cash provided by operating activities was $30.8 million. This primarily reflects net income of $10.2 million, non-cash depreciation, amortization and accretion of $21.1 million, an increase in accounts payable and accrued liabilities of $5.8 million, amortization and write-off of debt issuance costs of $5.6 million, an increase in deferred revenue of $4.8 million and a decrease in income taxes receivable of $2.0 million, partially offset by an increase in accounts receivable of $14.5 million and an increase in other assets of $4.0 million. Impacts on net income are due to the factors discussed above under “Results of Operations.” The increase in accounts payable and accrued liabilities is primarily attributable to the timing of payments to vendors for products and services. The increase in deferred revenue is primarily attributable to the timing of the treatment and disposal of waste received but not yet processed. The increase in accounts receivable is primarily attributable to the timing of customer payments. The decrease in income taxes receivable is primarily attributable to the timing of income tax payments.
Days sales outstanding were 77 days as of June 30, 2017, compared to 73 days as of December 31, 2016 and 74 days as of June 30, 2016.
For the six months ended June 30, 2016, net cash provided by operating activities was $38.7 million. This primarily reflects net income of $16.5 million, non-cash depreciation, amortization and accretion of $19.4 million, a decrease in accounts receivable of $6.6 million, share-based compensation expense of $1.6 million, a decrease in other assets of $1.3 million, and non-cash amortization of debt issuance costs of $1.1 million, partially offset by the gain recognized on the divestiture of the Augusta, Georgia facility in April 2016 and final closing adjustments on the Allstate divestiture of $2.2 million, an increase in income taxes receivable of $1.4 million, a decrease in deferred income taxes of $1.3 million, a decrease in deferred revenue of $1.2 million, a decrease in accounts payable and accrued liabilities of $872,000 and a decrease in closure and post-closure obligations of $848,000. Impacts on net income are due to the factors discussed above under “Results of Operations.” The decrease in receivables is primarily attributable to the timing customer payments. The increase in income taxes receivable is primarily attributable to the timing of estimated income tax payments. The decrease in deferred revenue is primarily attributable to the timing of the treatment and disposal of waste received but not yet processed. The decrease in closure and post-closure obligations is primarily attributable to payments made for closure and post-closure activities primarily at our closed landfills.
Investing Activities
For the six months ended June 30, 2017, net cash used in investing activities was $17.5 million, primarily related to capital expenditures. Significant capital projects included construction of additional disposal capacity at our Beatty, Nevada and Blainville, Quebec, Canada locations and equipment purchases and infrastructure upgrades at our corporate and operating facilities.
For the six months ended June 30, 2016, net cash used in investing activities was $16.7 million, primarily related to capital expenditures of $14.5 million and the purchase of Environmental Services Inc., (“ESI”), for $4.9 million, net of cash acquired, partially offset by proceeds from the divestiture of our Augusta, Georgia facility for $2.7 million, net of cash divested. Significant capital projects included construction of additional disposal capacity at our Blainville, Quebec,
Canada and Robstown, Texas facilities and equipment purchases and infrastructure upgrades at our corporate and operating facilities.
Financing Activities
For the six months ended June 30, 2017, net cash used in financing activities was $15.7 million, consisting primarily of $283.0 million of repayment of the Company’s long-term debt under the Former Credit Agreement, $281.0 million of initial proceeds from the issuance of long-term debt under the New Credit Agreement, $4.0 million of subsequent payments of long-term debt under the New Credit Agreement, $7.8 million of dividend payments to our stockholders and net payment activity on the Company’s short-term borrowings of $2.2 million.
For the six months ended June 30, 2016, net cash used in financing activities was $15.4 million, consisting primarily of $11.5 million of payments on the Company’s long-term debt under the Former Credit Agreement and $7.8 million of dividend payments to our stockholders, partially offset by $4.0 million of net short-term borrowings under the Former Credit Agreement to fund working capital requirements.
New Credit Agreement
The New Credit Agreement provides for a $500.0 million, five-year revolving credit facility (the “Revolving Credit Facility”), including a $75.0 million sublimit for the issuance of standby letters of credit and a $25.0 million sublimit for the issuance of swingline loans used to fund short-term working capital requirements. The New Credit Agreement also contains an accordion feature whereby the Company may request up to $200.0 million of additional funds through an increase to the Revolving Credit Facility, through incremental term loans, or some combination thereof. Proceeds from the Revolving Credit Facility are restricted solely for working capital and other general corporate purposes (including acquisitions and capital expenditures). Under the Revolving Credit Facility, revolving credit loans are available based on a base rate (as defined in the New Credit Agreement) or LIBOR, at the Company’s option, plus an applicable margin which is determined according to a pricing grid under which the interest rate decreases or increases based on our ratio of funded debt to consolidated earnings before interest, taxes, depreciation and amortization (as defined in the New Credit Agreement).
At June 30, 2017, the effective interest rate on the Revolving Credit Facility, including the impact of our interest rate swap, was 3.37%. Interest only payments are due either quarterly or on the last day of any interest period, as applicable. In October 2014, the Company entered into an interest rate swap agreement, effectively fixing the interest rate on $200.0 million, or 72%, of the Revolving Credit Facility borrowings as of June 30, 2017. The interest rate swap agreement continued to be effective following the termination of the Company’s Former Credit Agreement.
The Company is required to pay a commitment fee ranging from 0.175% to 0.35% on the average daily unused portion of the Revolving Credit Facility, with such commitment fee to be reduced based upon the Company’s total net leverage ratio (as defined in the New Credit Agreement). The maximum letter of credit capacity under the Revolving Credit Facility is $75.0 million and the New Credit Agreement provides for a letter of credit fee equal to the applicable margin for LIBOR loans under the Revolving Credit Facility. At June 30, 2017, there were $277.0 million of borrowings outstanding on the Revolving Credit Facility. These borrowings are due on the revolving credit maturity date (as defined in the New Credit Agreement) and presented as long-term debt in the consolidated balance sheets.
The Company has entered into a sweep arrangement whereby day-to-day cash requirements in excess of available cash balances are advanced to the Company on an as-needed basis with repayments of these advances automatically made from subsequent deposits to our cash operating accounts (the “Sweep Arrangement”). Total advances outstanding under the Sweep Arrangement are subject to the $25.0 million swingline loan sublimit under the Revolving Credit Facility. The Company’s revolving credit loans outstanding under the Revolving Credit Agreement are not subject to repayment through the Sweep Arrangement. As of June 30, 2017, there were no amounts outstanding subject to the Sweep Arrangement.
As of June 30, 2017, the availability under the Revolving Credit Facility was $216.7 million with $6.3 million of the Revolving Credit Facility issued in the form of standby letter of credit utilized as collateral for closure and post-closure financial assurance and other assurance obligations.
For more information about our debt, see Note 8 of the Notes to Consolidated Financial Statements in “Part I, Item 1. Financial Statements (Unaudited)” of this Quarterly Report on Form 10-Q.
CONTRACTUAL OBLIGATIONS AND GUARANTEES
Except as set forth in the paragraph below, there were no material changes in the amounts of our contractual obligations and guarantees during the six months ended June 30, 2017. 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, 2016.
On April 18, 2017, the Company entered into the New Credit Agreement. In connection with the Company’s entry into the New Credit Agreement, the Company terminated the Former Credit Agreement. For more information about our refinancing, see Note 8 of the Notes to Consolidated Financial Statements in “Part I, Item 1. Financial Statements (Unaudited)” of this Quarterly Report on Form 10-Q.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
We do not maintain equities, commodities, derivatives, or any other similar instruments for trading purposes. We have minimal interest rate risk on investments or other assets due to our preservation of capital approach to investments. At June 30, 2017, $5.8 million of restricted cash was invested in fixed-income U.S. Treasury and U.S. government agency securities and money market accounts.
We are exposed to changes in interest rates as a result of our borrowings under the New Credit Agreement. Under the New Credit Agreement, Revolving Credit Facility borrowings incur interest at a base rate (as defined in the New Credit Agreement) or LIBOR, at the Company’s option, plus an applicable margin which is determined according to a pricing grid under which the interest rate decreases or increases based on our ratio of funded debt to consolidated earnings before interest, taxes, depreciation and amortization (as defined in the New Credit Agreement). On October 29, 2014, the Company entered into an interest rate swap agreement with the intention of hedging the Company’s interest rate exposure on a portion of the Company’s outstanding LIBOR-based variable rate debt. The interest rate swap agreement continued to be effective following the termination of the Company’s Former Credit Agreement. Under the terms of the swap, the Company pays interest at the fixed effective rate of 5.17% and receives interest at the variable one-month LIBOR rate on an initial notional amount of $250.0 million.
As of June 30, 2017, there were $277.0 million of revolving loans outstanding under the New Credit Agreement. If interest rates were to rise and outstanding balances remain unchanged, we would be subject to higher interest payments on our outstanding debt. Subsequent to the effective date of the interest rate swap on December 31, 2014, we are subject to higher interest payments on only the unhedged borrowings under the New Credit Agreement.
Based on the outstanding indebtedness of $277.0 million under the New Credit Agreement at June 30, 2017 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 $845,000 for the corresponding period.
Foreign Currency Risk
We are subject to currency exposures and volatility because of currency fluctuations. The majority of our transactions are in USD; however, our Canadian subsidiaries conduct business in both Canada and the United States. In addition, contracts for services that our Canadian subsidiaries provide to U.S. customers are generally denominated in USD. During the six months ended June 30, 2017, our Canadian subsidiaries transacted approximately 56% of their revenue in USD and at any time have cash on deposit in USD and outstanding USD trade receivables and payables related to these transactions. These USD cash, receivable and payable accounts are subject to non-cash foreign currency translation gains or losses. Exchange rate movements also affect the translation of Canadian generated profits and losses into USD.
We established intercompany loans between our Canadian subsidiaries and our parent company, US Ecology, as part of a tax and treasury management strategy allowing for repayment of third-party bank debt. These intercompany loans are payable using CAD and are subject to mark-to-market adjustments with movements in the CAD. At June 30, 2017, we had $18.8 million of intercompany loans outstanding between our Canadian subsidiaries and US Ecology. During the six months ended June 30, 2017, the CAD strengthened as compared to the USD resulting in a $536,000 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 June 30, 2017, a $0.01 CAD increase or decrease in currency rate compared to the USD at June 30, 2017 would have generated a gain or loss of approximately $188,000 for the six months ended June 30, 2017.
We had a total pre-tax foreign currency gain of $246,000 for the six months ended June 30, 2017. We currently have no foreign exchange contracts, option contracts or other foreign currency hedging arrangements. Management evaluates the Company’s risk position on an ongoing basis to determine whether foreign exchange hedging strategies should be employed.
ITEM 4. CONTROLS AND PROCEDURES
Management of the Company, including the Chief Executive Officer and the Chief Financial Officer of the Company, have evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of June 30, 2017. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures, including the accumulation and communication of disclosures to the Company’s Chief Executive Officer and Chief Financial Officer as appropriate to allow timely decisions regarding required disclosure, are effective to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the rules and forms of the Securities and Exchange Commission (“SEC”).
There were no changes in our internal control over financial reporting that occurred during the most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.