Annual Report — Form 10-K Filing Table of Contents
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Compensation Plan
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(Exact
name of Registrant as specified in its Charter)
Delaware
95-3889638
(State
or other jurisdiction)
(I.R.S.
Employer Identification Number)
300
E. Mallard Dr., Suite 300
Boise,
Idaho
83706
(Address
of principal executive offices)
(Zip
Code)
(208)
331-8400
(Registrant’s
telephone number, including area
code)
SECURITIES
REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES
REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Title
of each class
Common
Stock, $0.01 par value
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes o No x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes o No
x
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes x No o
Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) is not
contained herein, and will not be contained, to the best of registrant’s
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form
10-K. x
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of
the Exchange Act. (Check one):
Large accelerated
filer o Accelerated
filer x Non-accelerated
filer o Smaller reporting company o
(Do not check
if a smaller reporting company)
Indicate
by check mark if the Registrant is a shell company (as defined in Rule 12b-2 of
the Act). Yes o No x
The
aggregate market value of the Registrant’s voting stock held by non-affiliates
on June 30, 2008 was approximately $487.9 million based on the closing price of
$29.53 per share as reported on the NASDAQ Global Market System.
At
February 23, 2009, Registrant had outstanding 18,304,314 shares of its Common
Stock.
Listed
hereunder are the documents, any portions of which are incorporated by reference
and the Parts of this Form 10-K into which such portions are
incorporated:
1.
The
Registrant’s definitive proxy statement for use in connection with the
Annual Meeting of Stockholders to be held on or about May 12, 2009 to be
filed within 120 days after the Registrant’s fiscal year ended December31, 2008, portions of which are incorporated by reference into
Part III of this
Form 10-K.
AMERICAN
ECOLOGY CORPORATION
FORM 10-K
TABLE
OF CONTENTS
Item
Page
PART I
Cautionary
Statement
3
1.
Business
4
1A.
Risk
Factors
13
1B.
Unresolved
Staff Comments
16
2.
Properties
17
3.
Legal
Proceedings
17
4.
Submission
of Matters to a Vote of Security Holders
17
PART II
5.
Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
18
6.
Selected
Financial Data
20
7.
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
21
7A.
Quantitative
and Qualitative Disclosures About Market Risk
34
8.
Financial
Statements and Supplementary Data
35
9.
Changes
in and Disagreements With Accountants on Accounting and Financial
Disclosure
57
9A.
Controls
and Procedures
57
9B.
Other
Information
57
PART III
10.
Directors,
Executive Officers and Corporate Governance
58
11.
Executive
Compensation
58
12.
Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
59
13.
Certain
Relationships and Related Transactions and Director
Independence
59
14.
Principal
Accountant Fees and Services
59
PART IV
15.
Exhibits
and Financial Statement Schedules
60
SIGNATURES
61
2
PART
I
Cautionary
Statement for Purposes of Safe Harbor Provisions of the Private Securities
Litigation Reform Act of 1995
This
annual report on Form 10-K contains forward-looking statements within the
meaning of federal securities laws. Statements that are not historical facts,
including statements about our beliefs and expectations, are forward-looking
statements. Forward-looking statements include those 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, the likelihood of our success in expanding our
business, financing plans, budgets, working capital needs and sources of
liquidity.
Forward-looking
statements are only predictions and are not guarantees of performance. These
statements are based on management's beliefs and assumptions, which in turn are
based on currently available information. Important assumptions include, among
others, those regarding demand for Company services, expansion of service
offerings geographically or through new 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, but are not limited to, a loss of a major customer,
compliance with and changes to applicable laws and regulations, access to cost
effective transportation services, access to insurance and other financial
assurances, loss of key personnel, lawsuits, labor disputes, adverse economic
conditions including a tightened credit market for customers, government funding
or competitive pressures, incidents or adverse weather conditions that could
limit or suspend specific operations, implementation of new technologies,
limitations on operation of recently installed thermal desorption and recycling
equipment at our Texas facility, market conditions for recycled materials, our
ability to perform under required contracts, our ability to permit and contract
for timely construction of new or expanded disposal cells, our willingness or
ability to pay dividends, our willingness or ability to repurchase our own
common stock under approved stock repurchase plans, and our ability to integrate
any potential acquisitions.
Except
as required by applicable law, including the securities laws of the United
States and the rules and regulations of the Securities and Exchange Commission,
or the SEC, we are under no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise. You should not place undue reliance on our forward-looking
statements. Although we believe that the expectations reflected in
forward-looking statements are reasonable, we cannot guarantee future results or
performance. Before you invest in our common stock, you should be aware that the
occurrence of the events described in the “Risk Factors” section in this annual
report on Form 10-K could harm our business prospects, operating results, and
financial condition.
Investors
should also be aware that while we do, from time to time, communicate with
securities analysts, it is against our policy to disclose to them any material
non-public information or other confidential commercial information.
Accordingly, stockholders should not assume that we agree with any statement or
report issued by any analyst irrespective of the content of the statement or
report. Furthermore, we have a policy against issuing or confirming financial
forecasts or projections issued by others. Thus, to the extent that reports
issued by securities analysts contain any projections, forecasts or opinions,
such reports are not the responsibility of American Ecology
Corporation.
3
Item
1. Business
General
The table
below contains definitions that are used throughout this Annual Report on Form
10-K.
Comprehensive
Environmental Response, Compensation and Liability Act of
1980
FUSRAP
U.S.
Army Corps of Engineers Formerly Utilized Site Remedial Action
Program
LARM
Low-activity
radioactive material exempt from federal Atomic Energy Act regulation for
disposal
LLRW
Low-level
radioactive waste regulated under the federal Atomic Energy Act for
disposal
NORM/NARM
Naturally
occurring and accelerator produced radioactive material
NRC
U.S.
Nuclear Regulatory Commission
PCBs
Polychlorinated
biphenyls
RCRA
Resource
Conservation and Recovery Act of 1976
SEC
U.
S. Securities and Exchange Commission
TCEQ
Texas
Commission on Environmental Quality
USACE
U.S.
Army Corps of Engineers
USEPA
U.S.
Environmental Protection Agency
WUTC
Washington
Utilities and Transportation
Commission
AEC,
through our subsidiaries, provides radioactive, hazardous, PCB and non-hazardous
industrial waste management and recycling services to commercial and government
entities, such as refineries and chemical production facilities, manufacturers,
electric utilities, steel mills, medical and academic institutions and waste
broker / aggregators. Headquartered in Boise, Idaho, we are one of the nation’s
oldest providers of such services. AEC and its predecessor companies have been
in business for more than 50 years. We operate nationally and employed 253
people as of December 31, 2008.
Our
filings with the SEC are posted on our website at www.americanecology.com.
The information found on our website is not part of this or any other report we
file with or furnish to the SEC. The public can also obtain copies of these
filings by visiting the SEC’s Public Reference Room at 100 F Street NE,
Washington DC 20549, or by calling the SEC at 1-800-SEC-0330 or by accessing the
SEC’s website at www.sec.gov.
AEC was
most recently incorporated as a Delaware corporation in May 1987. Our
wholly-owned primary operating subsidiaries are US Ecology Nevada, Inc., a
Delaware corporation (“USEN”); US Ecology Washington, Inc., a Delaware
corporation (“USEW”); US Ecology Texas, Inc., a Delaware corporation (“USET”);
US Ecology Idaho, Inc., a Delaware corporation (“USEI”) and US Ecology Field
Services, Inc., a Delaware corporation (“USEFS”). American Ecology Recycle
Center, Inc., a Delaware corporation (“AERC”) previously operated our
discontinued Oak Ridge, Tennessee LLRW processing business.
4
We
operate within two business segments: Operating Disposal Facilities and
Non-Operating Disposal Facilities. These segments reflect our current
operational status and internal reporting structure. Operating Disposal
Facilities accept hazardous, LARM and LLRW and include our RCRA hazardous waste
treatment and disposal facilities in Beatty, Nevada; Grand View, Idaho; and
Robstown, Texas; and our AEA disposal facility in Richland, Washington. Our
Washington, Idaho and (to a lesser degree) Texas facilities also accept certain
NORM/NARM waste and LARM. Non-Operating Disposal Facilities include our former
disposal facilities in Sheffield, Illinois; Beatty, Nevada; and Bruneau, Idaho
and a former hazardous waste processing and deep-well injection operation in
Winona, Texas. Income taxes are assigned to the corporate office. 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. Financial information with respect to each segment
is further discussed in Note 15 of the consolidated financial statements located
in Item 8 - Financial Statements and Supplementary Data to this Form
10-K.
The
following table summarizes each segment:
Subsidiary
Location
Services
Operating Disposal
Facilities
USEI
Grand
View, Idaho
Hazardous,
non-hazardous industrial, PCB, NORM/NARM, LARM and mixed waste treatment
and disposal, rail transfer station
USET
Robstown,
Texas
Hazardous,
non-hazardous industrial, LARM and NORM/NARM waste treatment and disposal,
recycling services, rail transfer station
USEN
Beatty,
Nevada
Hazardous,
non-hazardous industrial and PCB waste treatment and
disposal
USEW
Richland,
Washington
LLRW,
NORM/NARM and LARM waste disposal
Non-Operating
Facilities
US
Ecology, Inc. (“USE”)
Beatty,
Nevada
Closed
LLRW disposal facility under long-term care. State of Nevada is
licensee
USE
Sheffield,
Illinois
Closed
LLRW disposal facility under long-term care. State of Illinois is
licensee
USE
Sheffield,
Illinois
Non-operating
hazardous waste disposal facility: USE is permittee
American
Ecology Environmental Services Corporation (“AEESC”)
Winona,
Texas
Non-operating
hazardous waste processing and deep well facility: AEESC is
permittee
USEI
Bruneau,
Idaho
Closed
hazardous waste disposal facility: USEI is
permittee
Operating
Disposal Facilities
A
significant portion of our disposal revenue is derived from waste clean-up
projects (“Event Business”) which vary substantially in size duration and unit
price for our services. The duration of Event Business projects can last from a
one-week clean up of a small contaminated site to a multiple year clean-up
project. The one-time nature of Event Business necessarily creates variability
in revenue and earnings. The typically short notice on smaller Event Business
projects limits the precision of forward-looking financial projections. This
variability is also influenced by our provision of rail transportation services
to certain Event Business customers. The types and amounts of waste received
from recurring customers (“Base Business”) also vary quarter-to-quarter,
sometimes significantly, but are generally more predictable than Event
business.
5
Depending
on project-specific customer needs and competitive considerations,
transportation services may be offered at or near our cost to help secure
treatment and disposal business. For waste transported by rail from the east
coast such as our current Honeywell Jersey City project and other locations
distant from our Grand View, Idaho facility, transportation-related revenue can
account for as much as three-fourths (75%) of total project
revenue.
The types
and amounts of waste received, also referred to as “service mix,” can produce
significant quarter-to-quarter and year-to-year variations in revenue, gross
profit, gross margin, operating profit and net income for both Base and Event
business. For each of the years ended December 31, 2008 and 2007, Event Business
contributed approximately 52% of revenue and Base Business represented
approximately 48% of disposal revenue (excluding transportation revenue). Our
strategy is to continue expanding our Base Business while securing both
short-term and extended-duration Event Business. When Base Business covers our
fixed overhead costs, a significant portion of disposal revenue generated from
Event Business is generally realized as operating income and net income. This
strategy takes advantage of the operating leverage inherent to the largely
fixed-cost nature of the waste disposal business. Contribution margin
is influenced by whether the waste may be directly disposed or whether variable
costs are incurred to comply with regulations requiring treatment of certain
wastes prior to disposal.
Grand View, Idaho RCRA/TSCA
Facility. Our Grand View, Idaho facility was purchased in
2001. It is located on 1,252 acres of Company-owned land about 60
miles southeast of Boise, Idaho in the Owyhee Desert. We own an additional 159
acres approximately two miles east of the facility, which is used as a clay
source for disposal unit liner construction and 189 acres where our rail
transfer station is located approximately 30 miles northeast of the disposal
site. The disposal facility is permitted to accept hazardous, toxic and
non-hazardous waste regulated under RCRA and TSCA. This facility is also
permitted to accept certain NORM and NARM radioactive material and LARM exempted
from NRC regulation for disposal purposes, including certain “mixed” hazardous
and radioactive waste generated by commercial and government customers including
certain waste received under our USACE contract. We also treat and “delist”
hazardous electric arc furnace dust (“K061”) from steel mills. Delisted waste is
subject to lower state fees applicable to non-hazardous waste. The facility is
regulated under permits issued by the Idaho Department of Environmental Quality
and the USEPA.
Robstown, Texas RCRA
Facility. Our Robstown Texas facility began operations in
1973. It is located on 240 acres owned by the Company near Robstown,
Texas about 10 miles west of Corpus Christi. In 2005, we purchased an additional
200 acres of adjacent land for future expansion. We also own 174 acres of
non-adjacent land where we have operated a rail transfer station since 2006.
This facility is permitted to accept hazardous and non-hazardous waste regulated
under RCRA. The facility is regulated under a permit issued by the TCEQ and is
permitted to accept certain LARM and mixed wastes. In 2008 we began providing
hydrocarbon treatment and recycling services using thermal desorption equipment
owned and operated by a third party under contract.
Beatty, Nevada RCRA/TSCA
Facility. Our Beatty, Nevada facility, which began receiving hazardous
waste in 1970, is located in the Amargosa Desert about 120 miles northwest of
Las Vegas, Nevada and about 30 miles east of Death Valley, California. USEN
leases 80 acres from the State of Nevada for hazardous and PCB waste treatment
and disposal operations. In April 2007 we renewed our lease with the State of
Nevada as a year-to-year periodic tenancy until (i) the site reaches full
capacity and can no longer accept waste (generally estimated at about 10-12
years); (ii) the lease is terminated by us at our option; or (iii) the State
terminates the lease due to our breach of the lease terms. All other terms,
including those relating to rents and fees, were unchanged from the previous
lease. The Company-leased land is located within a 400 acre buffer zone leased
by the State of Nevada from the federal government which the Company believes is
a viable location for future expansion. The facility is regulated under permits
issued by the Nevada Department of Environmental Protection and the USEPA. The
State of Nevada assesses disposal fees to fund a dedicated trust account to pay
for closure and post-closure costs.
Richland, Washington LLRW
Facility. Our Richland, Washington LLRW facility has been in operation
since 1965 and is located on 100 acres of land leased from the State of
Washington on the U.S. Department of Energy Hanford Reservation 35 miles west of
Richland, Washington. USEW subleases this property from the State of Washington.
The lease between the State of Washington and the federal government expires in
2063. We renewed our sublease with the State of Washington in July 2005 for 10
years with four 10-year renewal options. The facility is licensed by the
Washington Department of Health for health and safety purposes. The WUTC sets
disposal rates for LLRW. Rates are set at an amount sufficient to cover
operating costs and provide us with a reasonable profit. In 2007, we entered a
new rate agreement with the WUTC that expires January 1, 2014. The State of
Washington assesses user fees for local economic development, state regulatory
agency expenses and a dedicated trust account to pay for long-term care after
the facility closes. The State of Washington maintains a separate trust fund for
future closure expenses. The Richland facility is also home to our On-Site
Services group, which arranges waste LLRW and LARM packaging, shipment and
disposal services.
6
Non-Operating
Disposal Facilities
Beatty, Nevada LLRW Site. We
operated the Beatty, Nevada LLRW disposal site from 1962 to 1993. This was the
nation’s first commercial LLRW disposal facility. In 1997, we became the first
operator to complete closure and post-closure at such a facility and transfer
our license to the State of Nevada, which is responsible for long-term
institutional control. We have a contract with the State to perform certain
long-term care work.
Bruneau, Idaho RCRA Site.
This remote 83 acre desert site, acquired along with the Grand View,
Idaho disposal operation in 2001, was closed by the prior owner under an
approved RCRA plan. Post-closure monitoring is expected to continue for
approximately 23 more years in accordance with permit and regulatory
requirements.
Sheffield, Illinois LLRW
Site. We operated a LLRW disposal facility near Sheffield, Illinois on 20
acres owned by the State of Illinois from 1968 to 1978. After we performed the
required closure work, our LLRW license was transferred to the State of Illinois
in 2001. The State of Illinois is responsible for long-term
institutional control. We have a contract with the State to perform certain
long-term care work.
Sheffield, Illinois RCRA
Site. We previously operated two hazardous waste disposal areas next to
the Sheffield LLRW disposal area. The first opened in 1968 and ceased operations
in 1974. The second accepted waste from 1974 through 1983. We expect to perform
groundwater remediation and monitoring at the site for approximately 18 more
years.
Winona, Texas Site. From 1980
to 1994, Gibraltar Chemical Resources operated the Winona hazardous waste
processing and deep well facility. In 1994, we purchased the facility. Solvent
recovery, deep well injection and waste brokering operations were conducted on a
nine acre site until 1997 when we ceased operations. We are proceeding under an
agreed order with the State of Texas for closure and expect to perform
monitoring for a 30 year post-closure care period. We own an additional 303
acres adjacent to the permitted site.
INDUSTRY
In the
1970s and 1980s, industry growth was driven by new environmental laws and
actions by federal and state agencies to regulate existing hazardous waste
management facilities and direct the clean up of contaminated sites under the
federal Superfund law. By the early 1990s, excess hazardous waste management
capacity had been constructed by the waste services industry. At the same time,
to better manage risk and reduce expenses, many waste generators instituted
industrial process changes and other methods to reduce waste production. Waste
volumes shipped for disposal from Superfund and other properties also diminished
as contaminated sites were cleaned up. These factors led to highly competitive
market conditions that still apply today.
We
believe that a baseline demand for hazardous waste services will continue into
the future with fluctuations (increases and decreases) driven by general and
industry-specific economic conditions, identification of new clean-up needs,
clean-up project schedules and public policy decisions. We further believe that
the ability to deliver specialized niche services while aggressively competing
for large volume clean-up projects and non-niche commodity business
opportunities differentiates successful from less successful companies. We seek
to control variable costs, expand service lines, expand waste throughput
capabilities, build market share and ultimately increase profitability. Past
initiatives that have successfully contributed to our increased operating income
include, but are not limited to:
·
acquiring
our Grand View, Idaho treatment and disposal facility and rail transfer
station in 2001;
·
expanding
our radioactive material and hazardous waste permits to manage additional
types of waste;
·
acquiring
and operating patented thermal treatment units at our Beatty, Nevada
site;
·
expanding
our rail transportation services through a fleet of leased and
Company-owned rail cars;
·
constructing
a second truck-to-rail transload building in Idaho and developing a rail
transfer station in Texas;
·
constructing
new, high-capacity waste treatment buildings in Texas and Nevada with
automated waste treatment additive delivery systems and expanded waste
storage capabilities;
·
opening
an organic chemical waste treatment laboratory in Texas to improve
treatment “recipes” and reduce costs at all three of our RCRA facilities;
and
·
establishing
a thermal desorption service at our Robstown, Texas site which allows the
facility to accept a broad spectrum of recyclable, hydrocarbon-based
materials.
7
Our
Richland, Washington disposal facility, serving the Northwest and Rocky Mountain
Compacts, is one of two operating Compact disposal facilities in the nation.
Both were in full operation for decades before passage of the federal LLRW
Policy Act in 1980. While our Washington disposal facility has substantial
unused capacity, it can only accept LLRW from the 11 western states comprising
the two Compacts served. The Barnwell, South Carolina site, operated by Energy
Solutions exclusively serves the three-state Atlantic Compact. LLRW from states
outside the Northwest Compact region may be disposed at a non-compact,
commercial disposal site in Clive, Utah, also operated by Energy
Solutions.
Pricing
at the three AEA licensed LLRW disposal facilities heightened demand for more
cost-effective disposal of soil, debris, consumer products, industrial wastes
and other materials containing LARM including “mixed wastes” exhibiting both
hazardous and radioactive properties. In addition to commercial demand, a
substantial amount of LARM is generated by government clean-up projects. The
NRC, USEPA and USACE have authorized the use of hazardous waste disposal
facilities to dispose of certain LARM, encouraging expansion of this compliant,
cost-effective alternative. Our Grand View, Idaho RCRA hazardous waste facility
has significantly increased waste throughput based on permit modifications
allowing expanded LARM acceptance. Our Robstown, Texas disposal facility is also
permitted to accept LARM on a more limited basis. We believe we are well
positioned to continue growing our LARM business based on our:
·
industry
reputation and commercial branding;
·
existing
permits, including recent modifications allowing additional waste
types;
·
safety
and regulatory compliance record;
·
decades
of experience safely handling radioactive materials at multiple
facilities;
·
high
volume waste throughput capabilities including rail transportation;
and
·
competitive
pricing.
Permits,
Licenses and Regulatory Requirements
Our
hazardous, industrial, non-hazardous and radioactive materials business is
subject to extensive federal and state environmental, health, safety, and
transportation laws, regulations, permits and licenses. Local government
controls also apply. The responsible government regulatory agencies regularly
inspect our operations to monitor compliance. They have authority to enforce
compliance through the suspension or revocation of operating licenses and
permits and the imposition of civil or criminal penalties in case of violations.
We believe that this body of law and regulations and the specialized services we
provide contribute to demand and represent a significant obstacle to new market
entrants.
RCRA
provides a comprehensive framework for regulating hazardous waste
transportation, treatment, storage and disposal. LARM and NORM/NARM may also be
managed under RCRA permits, as is authorized for our facilities in Grand View,
Idaho and Robstown, Texas. RCRA regulation is the responsibility of the USEPA,
which may delegate authority to state agencies. Chemical compounds and residues
derived from USEPA listed industrial processes are subject to RCRA standards
unless they are delisted through rulemaking such as the steel mill treatment
process employed at our Grand View, Idaho facility. RCRA liability may be
imposed for improper waste management or failure to take corrective action for
releases of hazardous substances. To the extent wastes are recycled or
beneficially reused, regulatory controls and permitting requirements under RCRA
diminish.
CERCLA
and its amendments impose strict, joint and several liability on owners or
operators of facilities where a release of hazardous substances has occurred, on
parties who generated hazardous substances released at such facilities and on
parties who arranged for the transportation of hazardous substances. Liability
under CERCLA may be imposed if releases of hazardous substances occur at
treatment, storage, or disposal sites. Since waste generators are subject to the
same liabilities, we believe that they are motivated to minimize the number of
disposal sites used. Disposal facilities require USEPA authorization to receive
CERCLA wastes. Our three hazardous waste disposal facilities have this
authorization.
TSCA
regulates the treatment, storage and disposal of PCBs. Regulation and licensing
of PCB wastes is the responsibility of the USEPA. Our Grand View, Idaho and
Beatty, Nevada disposal facilities have TSCA treatment, storage and disposal
permits. Our Texas facility has a TSCA storage permit and may dispose of
PCB-contaminated waste in limited concentrations not requiring a TSCA disposal
permit.
The AEA
assigns the NRC regulatory authority over receipt, possession, use and transfer
of certain radioactive materials, including disposal. The NRC has adopted
regulations for licensing commercial LLRW disposal and has delegated regulatory
authority to certain states including Washington, where our Richland facility is
located. The NRC and U.S. Department of Transportation regulate the transport of
radioactive materials. Shippers must comply with both the general requirements
for hazardous materials transportation and specific requirements for
transporting radioactive materials.
8
The
Energy Policy Act of 2005 amended the AEA to classify discrete NORM/NARM as
byproduct material. The law does not apply to interstate Compacts ratified by
Congress pursuant to the LLRW Policy Act. NRC regulations issued in 2006 to
implement the law limit receipt of certain NARM waste at our Grand View, Idaho
facility to non-production accelerators. This did not materially
affect our Idaho business and did not affect our Washington
business.
Obtaining
authorization to construct and operate new radioactive or hazardous waste
facilities is a lengthy and complex process. We believe we have demonstrated
significant expertise in this area. We also believe we possess all permits,
licenses and regulatory approvals required to maintain regulatory compliance and
operate our facilities and have the specialized expertise required to obtain
additional approvals to continue growing our business in the
future.
We incur
costs and make capital investments to comply with environmental regulations.
These regulations require that we operate our facilities in accordance with
permit-specific requirements. Our Idaho and Texas facilities, and to
a lesser extent our Nevada facility, are also required to provide required
financial assurance for closure and post-closure obligations should our
facilities cease operations. Both human resource and capital
investments are required to maintain compliance with these
requirements.
Insurance,
Financial Assurance and Risk Management
We carry
a broad range of insurance coverage, including general liability, automobile
liability, real and personal property, workers’ compensation, directors’ and
officers’ liability, environmental impairment liability and other coverage
customary to the industry. We do not expect the impact of any known casualty,
property, environmental or other contingency to be material to our financial
condition, results of operations or cash flows.
As noted
above, applicable regulations require financial assurance to cover the cost of
final closure and post-closure obligations at certain of our operating and
non-operating disposal facilities. Acceptable forms of financial assurance
include third-party standby letters of credit, surety bonds and insurance.
Alternatively, we may be required to collect fees from waste generators to fund
state-controlled escrow or trust accounts during the operating life of the
facility. Through December 31, 2008, we have met our financial assurance
requirements through insurance and self-funded restricted trusts.
Insurance
policies covering our closure and post-closure obligation were renewed in
December 2005 and expire in December 2009. Under the renewal terms, we placed
$4.5 million of cash in an interest bearing trust account to guarantee our
non-operating site closure and post-closure liability, subject to regulatory
approval. We are also required by our insurer to maintain collateral equal to
15% of our aggregate financial assurance insurance policies for our operating
sites through the policy term. While we expect to timely renew these policies,
if we are unable to obtain adequate closure, post-closure or environmental
insurance in the future, any partial or completely uninsured claim against us,
if successful, could have a material adverse effect on our financial condition,
results of operations and cash flows. Failure to maintain adequate financial
assurance could also result in regulatory action including early closure of
facilities. As of December 31, 2008, we have provided collateral of $4.7 million
in funded trust agreements, issued $4.0 million in letters of credit for
financial assurance and have insurance policies of approximately $33 million for
closure and post-closure obligations. While we have been able to obtain the
required financial assurance, premium and collateral requirements may increase,
which may have an adverse impact on our results of operations.
Primary
casualty insurance programs do not generally cover accidental environmental
contamination losses. To provide insurance protection for potential claims, we
maintain environmental impairment liability insurance and professional
environmental consultant’s liability insurance for non-nuclear occurrences. For
nuclear liability coverage, we maintain Facility Form and Workers’ Form nuclear
liability insurance provided under the federal Price Anderson Act. This
insurance covers the operations of our facilities, suppliers and transporters.
We purchase primary property, casualty and excess liability policies through
traditional third-party insurance carriers.
9
Significant
Customers
We
dispose of LARM and hazardous waste under a contract with the
USACE. We also arrange transportation of waste to our disposal
facilities for both government and industry customers which contributes
significant revenue. In June 2005, we entered into an Event Business clean-up
project with Honeywell International, Inc. (“Honeywell”) to transport, treat and
dispose of an estimated 1.2 million tons of chromite ore processing residue at
our Grand View, Idaho disposal facility. Under a federal court order, Honeywell
is required to complete this clean-up project by November 2009. The following
two customers accounted for more than 10% of our revenue in 2008, 2007 or
2006:
Percent
of Revenue
Customer
2008
2007
2006
Honeywell
International, Inc.
43%
41%
38%
U.S.
Army Corps of Engineers
6%
7%
10%
Markets
Disposal Services. Waste
containing heavy metals or hazardous waste that does not require treatment prior
to disposal is generally commoditized and subject to highly competitive pricing.
These commoditized services are also sensitive to transportation distance and
related costs. Waste transported by rail is typically less expensive, on a per
mile basis, than waste transported by truck. Hazardous waste containing organic
chemical compounds is less of a commoditized service. LARM services are also
less commoditized.
Our
Robstown, Texas hazardous waste facility is well positioned to serve refineries,
chemical production plants and other industries concentrated near the Texas Gulf
coast. The facility also accepts certain NORM and LARM. In 2006, we constructed
a rail transfer station approximately five miles
from this facility that extends the facility’s geographic reach. In 2007, our
Texas facility expanded its laboratory to include analysis of organic chemical
compounds, which are contained in many of the wastes produced by customers. In
June 2008, we began operating a high-throughput thermal desorption unit at the
facility which allows us to accept a broad spectrum of recyclable,
hydrocarbon-based materials.
Our
Beatty, Nevada facility primarily competes for business in California, Arizona,
Utah and Nevada. Due to the site’s superior geologic and climate conditions in
the Amargosa Desert, the Beatty, Nevada facility also competes for wastes from
more distant locations. The Beatty, Nevada facility competes over a larger
geographic area for PCB waste due to the more limited number of TSCA disposal
facilities nationwide. The Beatty, Nevada facility also offers patented
low-throughput thermal treatment services, primarily to customers in western
states, as a cost-effective alternative to incineration.
Our Grand
View, Idaho facility accepts waste from across the nation shipped through our
rail transfer station located adjacent to a main east-west rail line. Waste
throughput has been significantly enhanced by rail track expansions in 2006 and
2008 and the construction of a second rail–to-truck indoor transfer building in
2006. The Grand View facility’s primary markets are RCRA, LARM and mixed waste
clean-up projects, brokered waste and steel mill air pollution control dust.
Permit modifications have expanded LARM services. Substantial waste volumes are
received under our contract with Honeywell which is scheduled to be completed in
2009, and a contract with the USACE that is also utilized by other federal
agencies. The current USACE contract expires in 2009; however, multi-year
projects now underway before that date may continue for five years beyond 2009
under the same terms. Based on past public statements, we believe that the USACE
generally expects the federal clean-up program funding the contract to continue
through 2018. For this reason and due to limited competition, we expect to enter
a follow-on contract in 2009.
To meet
USEPA land disposal restrictions (“LDRs”), waste stabilization, encapsulation,
chemical oxidation and other treatment technologies are used at our Grand View,
Idaho, Beatty, Nevada and Robstown, Texas facilities. These capabilities allow
all three sites to manage a much broader spectrum of wastes than if LDR
treatment was not offered. The Beatty, Nevada and Robstown, Texas
facilities also offer thermal desorption treatment and recycling
services.
Our
Richland, Washington disposal facility serves LLRW producers in the eight states
of the Northwest Compact. The three Rocky Mountain Compact states may also use
our facility. Since we are a designated monopoly LLRW service provider in the
Northwest Compact, the State of Washington approves our disposal rates. Since
NORM/NARM is not subject to Compact restrictions, we may accept this waste from
all fifty states. Rate regulation does not apply to NORM/NARM pricing since
monopoly conditions do not apply.
10
Competition
We
compete with large and small companies in each of the commercial markets we
serve. While niche services apply, the radioactive, hazardous and non-hazardous
industrial waste management industry is generally very competitive. We believe
that our primary hazardous waste and PCB disposal competitors are Clean Harbors,
Inc., Waste Control Specialists, LLC and Waste Management, Inc. We believe that
our primary radioactive material disposal competitors are Energy Solutions and
Waste Control Specialists, LLC. The principal competitive factors applicable to
both of these business areas are:
·
price;
·
specialized
permits and “niche” service
offerings;
·
customer
service;
·
operational
efficiency and technical expertise;
·
regulatory
compliance and worker safety;
·
industry
reputation and brand name
recognition;
·
transportation
distance; and
·
local
community support.
We
believe that we are competitive in all markets we serve and that we offer a
nationally unique mix of services, including niche technologies and services
that favorably distinguish us from competitors. We also believe that our strong
brand name recognition from more than five decades of experience, compliance and
safety record, customer service reputation and positive relations with
regulators and local communities enhance our competitive position. Advantages
exist for competitors that have technology, permits or equipment to handle a
broader range of waste, that operate in jurisdictions imposing lower disposal
fees and/or are located closer to where wastes are generated.
We do not
compete with companies seeking federal government contracts to manage and/or
operate radioactive waste treatment and disposal facilities owned by the U.S.
Department of Energy (“USDOE”). We accept minimal amounts of remediation waste
from USDOE facilities at Company disposal facilities from time to time, however,
this is not a material part of our business.
Seasonal
Effects
Market
conditions and federal funding decisions generally have a larger effect on
revenue than does seasonality. Operating revenue is generally lower
in the winter months, however, and increases when short-term, weather-influenced
clean-up projects are more frequently undertaken. While large,
multi-year clean-up projects tend to continue in winter months, the pace of
waste shipments may be slower due to weather.
Personnel
On
December 31, 2008, we had 253 employees, of which 10 were members of the Paper,
Allied-Industrial Chemical & Energy Workers International Union, AFL-CIO,
CLC (PACE) at our Richland, Washington facility.
11
Executive
Officers of Registrant
The
following table sets forth the names, ages and titles, as well as a brief
account of the business experience of each person who is an executive officer of
AEC:
Name
Age
Title
Stephen
A. Romano
54
Chairman
of the Board of Directors, Chief Executive Officer
James
R. Baumgardner
46
President
and Chief Operating Officer
Simon
G. Bell
38
Vice
President of Operations
John
M. Cooper
54
Vice
President and Chief Information Officer
Jeffrey
R. Feeler
39
Vice
President and Chief Financial Officer
Eric
L. Gerratt
38
Vice
President and Controller
Steven
D. Welling
50
Vice
President, Sales and
Marketing
Stephen A.
Romano was appointed President and Chief Operating Officer in October
2001 and Chief Executive Officer in March 2002. Mr. Romano joined the Board of
Directors in 2002 and was elected Chairman of the Board of Directors in February
2008. Mr. Romano has been with us for 19 years. Previously, he held
positions with the NRC, the Wisconsin Department of Natural Resources and
EG&G Idaho. He holds a BA from the University of Massachusetts-Amherst and
an MS from the University of Wisconsin-Madison.
James R.
Baumgardner was appointed President
and Chief Operating Officer in January 2009. Mr. Baumgardner
previously served as the Company’s Senior Vice President and Chief Financial
Officer from 1999 to 2006. From 2006 to 2008, he was Senior Vice
President and Chief Financial Officer with SECOR International Inc., a Redmond,
Washington based provider of environmental consulting services. Prior
to 1999, he held various positions in corporate banking, corporate treasury and
investment banking. He holds an MBA and a BS from Oregon State
University.
Simon G.
Bell was appointed Vice President of Operations in August of 2007 and is
responsible for managing both operating and closed facilities. From 2005 to
August 2007, he was Vice President of Hazardous Waste Operations and from 2002
to 2005, our Idaho facility General Manager and Environmental Manager. His 17
years of industry experience includes service as general manager of a competitor
disposal facility and mining industry experience in Idaho, Nevada and South
Dakota. He holds a BS in Geology from Colorado State University.
John M.
Cooper joined us in July 2002 and is Vice President and Chief Information
Officer. Previously, he served as Vice President, Information Systems for BMC
West Corporation and was Director of Business Development for the High Tech
Industry at Oracle Corporation. Mr. Cooper offers more than 20 years of computer
industry experience. He holds a BS in Physics from Utah State
University.
Jeffrey R.
Feeler was appointed Vice President, Chief Financial Officer, Treasurer
and Secretary in May 2007. He joined AEC in 2006 as Vice President, Controller,
Chief Accounting Officer, Treasurer and Secretary. He previously held financial
and accounting management positions with MWI Veterinary Supply, Inc.
(2005-2006), Albertson’s, Inc. (2003-2005) and Hewlett-Packard Company
(2002-2003). From 1993 to 2002, he held various accounting and auditing
positions, most recently as a Senior Manager for PricewaterhouseCoopers LLP. Mr.
Feeler is a Certified Public Accountant and holds a BBA of Accounting and a BBA
of Finance from Boise State University.
Eric L. Gerratt
joined AEC in August 2007 as Vice President and Controller. He
previously held various financial and accounting management positions at
SUPERVALU, Inc (2006-2007) and Albertson’s, Inc. (2003-2006). From
1997 to 2003, he held various accounting and auditing positions, most recently
as a Manager for PricewaterhouseCoopers LLP. Mr. Gerratt is a
Certified Public Accountant and holds a BS in Accounting from the University of
Idaho.
Steven D.
Welling joined us in 2001 through the Envirosafe Services of Idaho (now
US Ecology Idaho) acquisition. He previously served as National Accounts Manager
for Envirosource Technologies and Western Sales Manager for Envirosafe Services
of Idaho and before that managed new market development and sales for a national
bulk chemical transportation company. Mr. Welling holds a BS from California
State University-Stanislaus.
12
Item
1A. Risk Factors
In
addition to the factors discussed elsewhere in this Form 10-K, the
following are important factors which could cause actual results or events to
differ materially from those contained in any forward-looking statements made by
or on behalf of us.
A
significant portion of our business depends upon non-recurring event clean-up
projects over which we have no control.
A
significant portion of our disposal revenue is attributable to discrete Event
Business which varies widely in size, duration and unit pricing. For the year
ended December 31, 2008, approximately 52% of our treatment and disposal
revenues were derived from Event Business projects. The one-time nature of Event
Business necessarily creates variability in revenue and earnings. This
variability is further influenced by service mix, funding availability, changes
in laws and regulations, government enforcement actions, public controversy,
litigation, weather, property redevelopment plans and other factors. As a result
of this variability, we can experience significant quarter-to-quarter and
year-to-year volatility in revenue, gross profit, gross margin, operating income
and net income. Also, while many large project opportunities are identifiable
years in advance, both large and small project opportunities also routinely
arise with little prior notice. This uncertainty, which is inherent to the
hazardous and radioactive waste disposal industry, is factored into our
budgeting and externally communicated business projections. Our
projections combine historical experience with identified sales pipeline
opportunities and planned initiatives for new or expanded service lines. A
reduction in the number and size of new clean-up projects won to replace
completed work could have a material adverse affect on our
business.
The
loss of or failure to renew one or more significant contracts could adversely
affect our profitability.
Honeywell
and the USACE are under multiple year contracts which accounted for
approximately 43% and 6% of our total revenues for the year ended December 31,2008, respectively. Honeywell and USACE both have contracts with us to provide
waste services through 2009. The Honeywell Jersey City project is estimated to
complete the shipment of approximately 1.2 million tons of waste to our Grand
View, Idaho facility during 2009. As of December 31, 2008, we have disposed of
approximately one million tons. While we believe that the USACE will contract
for our services for the estimated duration of the FUSRAP through 2018 and
potentially beyond, this cannot be assured. Our contract with the USACE does not
guarantee any funding beyond project-specific task orders. Reduced
appropriations for the USACE and other government clean-up work or a reduction
in project-specific task orders under historic appropriation levels could have a
material adverse affect on our business. Reduced funding and/or the
loss of or failure to renew these or other large contracts and task orders
combined with failure to replace their contribution with new projects could
result in a material adverse affect on our business.
Adverse
economic conditions, government funding or competitive pressures affecting our
customers could harm our business.
We serve
oil refineries, chemical production plants, steel mills, waste
broker-aggregators serving small manufacturers and other customers that are, or
may be, affected by changing economic conditions and competition. These
customers may be significantly impacted by a deterioration in general economic
conditions and may curtail waste production and/or delay spending on plant
maintenance, waste clean-up projects and other discretionary
work. Spending by government agencies may be also be reduced due to
declining tax revenues that may result from a general deterioration in economic
conditions. Factors that can impact general economic conditions and
the level of spending by our customers include the general level of consumer and
industrial spending, increases in fuel and energy costs, residential and
commercial real estate and mortgage market conditions, labor and healthcare
costs, access to credit, consumer confidence and other macroeconomic factors
affecting spending behavior. Market forces may also compel customers
to cease or reduce operations, declare bankruptcy, liquidate or relocate to
other countries, any of which could adversely affect our business.
Also,
approximately 6% of our total 2008 revenue was generated from the USACE. We have
a long-term disposal contract with the USACE that expires in 2009. While
multi-year USACE projects may continue under the contract for up to five years
beyond 2009, the contract does not guarantee any funding beyond assigned
project-specific task orders or a follow-on contract for projects first awarded
after 2009. Failure to secure new USACE task orders or a new contract vehicle
for post-2009 projects or reduced appropriations for the USACE and other
government clean-up work requiring our services could have a material adverse
affect on our business. Our operations are significantly affected by the
commencement and completion of both large and multiple, smaller clean-up
projects; potential seasonal fluctuations due to weather; budgetary decisions
and cash flow limitations influencing the timing of customer spending for
remedial activities; the timing of regulatory agency decisions and judicial
proceedings; changes in government regulations and enforcement policies and
other factors that may delay or cause the cancellation of clean-up projects. We
do not control such factors, which can cause our revenue and income to vary
significantly from quarter-to-quarter and year-to-year.
13
If
we fail to comply with applicable laws and regulations our business could be
adversely affected.
The
changing regulatory framework governing our business creates significant risks.
We could be held liable if our operations cause contamination of air,
groundwater or soil. Under current law, we may be held liable for damage caused
by conditions that existed before we acquired the assets or operations involved.
Also, we may be liable if we arrange for the transportation, disposal or
treatment of hazardous substances that cause environmental contamination at
facilities operated by others, or if a predecessor made such arrangements and we
are a successor. Liability for environmental damage could have a material
adverse effect on our financial condition, results of operations and cash
flows.
Stringent
regulations of federal and state governments have a substantial impact on our
business. Local government controls also apply. Many complex laws, rules, orders
and regulatory interpretations govern environmental protection, health, safety,
land use, zoning, transportation and related matters. Failure to obtain on a
timely basis or comply with applicable federal, state and local governmental
regulations, licenses, permits or approvals for our waste treatment and disposal
facilities could prevent or restrict our ability to provide certain services,
resulting in a potentially significant loss of revenue and earnings. Changes in
environmental regulations may require us to make significant capital or other
expenditures. Changes in laws or regulations or changes in the enforcement or
interpretation of existing laws regulations or permitted activities may require
us to modify existing operating licenses or permits, or obtain additional
approvals. New governmental requirements that raise compliance standards or
require changes in operating practices or technology may impose significant
costs and/or limit operations.
Our
revenues are primarily generated as a result of requirements imposed on our
customers under federal and state laws, and regulations to protect public health
and the environment. If requirements to comply with laws and regulations
governing management of PCB, hazardous or radioactive waste were relaxed or less
vigorously enforced, demand for our services could materially decrease and our
revenues and earnings could be significantly reduced.
Our
market is highly competitive. Failure to compete successfully could have a
material adverse effect on our business, financial condition and results of
operation.
We face
competition from companies with greater resources, service offerings we do not
provide and lower pricing in certain instances. An increase in the
number of commercial treatment or disposal facilities for hazardous or
radioactive waste, significant expansion of existing competitor permitted
capabilities or a decrease in the treatment or disposal fees charged by
competitors could materially and adversely affect our results of operations. Our
business is also heavily affected by waste tipping fees imposed by government
agencies. These fees, which vary from state to state and are periodically
adjusted, may adversely impact the competitive environment in which we conduct
our business.
If
we are unable to obtain regulatory approvals and contracts for construction of
additional disposal space by the time our current disposal capacity is
exhausted, our business would be adversely affected.
Construction
of new disposal capacity at our operating disposal facilities beyond currently
permitted capacity requires state regulatory agency
approvals. Administrative processes for such approval reviews
vary. The State of Texas, which regulates our Robstown facility,
provides for an adjudicatory hearing process administered by a hearing officer
appointed by the State. While we have historically been successful in obtaining
timely approvals for proposed disposal facility expansions including those
involving adjudicatory processes, there can be no assurance that we will be
successful in obtaining future expansion approvals in a timely manner or at
all. If we are not successful in receiving these approvals, our
disposal capacity could eventually be exhausted, preventing us from accepting
additional waste at an affected facility. This would have a material
adverse effect on our business.
We
may not be able to obtain timely or cost effective transportation services which
could adversely affect our profitability.
Revenue
at each of our facilities is subject to potential risks from disruptions in rail
or truck transportation services relied upon to deliver waste to our facilities.
Increases in fuel costs and unforeseen events such as labor disputes, public
health pandemics, natural disasters and other acts of God, war, or terror could
prevent or delay shipments and reduce both volumes and revenue. Our rail
transportation service agreements with our customers generally allow us to pass
on fuel surcharges assessed by the railroads, which decrease or eliminate our
exposure to fuel cost increases. Transportation services may be limited by
economic conditions, including increased demand for rail or trucking services,
resulting in periods of slower service to the point that individual customer
needs cannot be met. No assurance can be given that we can procure
transportation services in a timely manner at competitive rates or pass through
fuel cost increases in all cases. Such factors could also limit our ability to
implement our plans to increase revenue and earnings.
14
If
we are unable to obtain at a reasonable cost the necessary levels of insurance
and financial assurances required for operations, our business and results of
operations would be adversely affected.
We are
required by law, license, permit, and prudence to maintain various insurance
instruments and financial assurances. We carry a broad range of insurance
coverages that are customary for a company of our size in our business. We
obtain these coverages to mitigate risk of loss, allowing us to manage our
self-insured exposure from potential claims. We are self-insured for employee
health-care coverage. Stop-loss insurance is carried covering liability on
claims in excess of $150,000 per individual or on an aggregate basis for the
monthly population. Accrued costs related to the self-insured health care
coverage were $234,000 and $184,000 at December 31, 2008 and 2007, respectively.
We also maintain a Pollution and Remediation Legal Liability Policy pursuant to
RCRA regulations subject to a $250,000 self-insured retention. In addition, we
are insured for consultant’s environmental liability subject to a $100,000
self-insured retention. We are also insured for losses or damage to third party
property or people subject to a $50,000 self-insured retention. To the extent
our insurances were unable to meet their obligations, or our own obligations for
claims were more than expected, there could be a material adverse effect to our
financial condition and results of operation.
Through
December 31, 2008, we have met our financial assurance requirements through
insurance. Our current closure and post-closure policies were renewed in
December 2005 and expire in December 2009. This renewal required us to self-fund
$4.5 million of non-operating site closure and post-closure liability and
provide collateral equal to 15% of financial assurance through the term of the
policy. We currently have in place all financial assurance instruments necessary
for our operations. While we expect to continue renewing these policies, if we
were unable to obtain adequate closure, post-closure or environmental insurance
in the future, any partially or completely uninsured claim against us, if
successful and of sufficient magnitude, could have a material adverse effect on
our results of operations and cash flows. Additionally, continued access to
casualty and pollution legal liability insurance with sufficient limits, at
acceptable terms, is important to obtaining new business. Failure to maintain
adequate financial assurance could also result in regulatory action including
early closure of facilities. As of December 31, 2008, we have provided
collateral of $4.7 million in funded trust agreements and issued $4.0 million in
letters of credit through our primary bank for financial assurance insurance
policies of approximately $33 million for closure and post-closure obligations.
While we believe we will be able to maintain the requisite financial assurance
policies at a reasonable cost, premium and collateral requirements may
materially increase. Such increases could have a material adverse
effect on our financial condition and results of operations.
Loss
of key management or sales personnel could harm our business.
We have
an experienced management team and rely on the continued service of our senior
managers to achieve our objectives. We also have a senior sales team with
industry experience averaging over 15 years. Our objective is to retain our
present management and sales teams and identify, hire, train, motivate and
retain highly skilled personnel. The loss of any key management employee or
sales personnel could adversely affect our business and results of
operations.
The
hazardous and radioactive waste industry in which we operate is subject to
litigation risk.
The
handling of radioactive, PCBs and hazardous materials subjects us to potential
liability claims by employees, contractors, property owners, neighbors and
others. There can be no assurance that our existing liability insurance is
adequate to cover claims asserted against us or that we will be able to maintain
adequate insurance in the future. Adverse rulings in legal matters could also
have a material adverse effect on our financial condition and results of
operations.
Our
business requires the handling of dangerous substances. Improper handling of
such substances could result in an adverse impact on our business.
We are
subject to unexpected occurrences related, or unrelated, to the routine handling
of dangerous substances. A fire or other incident, such as the fire in 2004 in
our Robstown, Texas waste treatment building, could impair one or more
facilities from performing normal operations. This could have a material adverse
impact on our financial condition and results of operations. Improper handling
of these substances could also violate laws and regulations resulting in fines
and/or suspension of operations.
15
Failure to perform under our
contracts may adversely harm our business.
Certain
contracts require us to meet specified performance criteria. Our ability to meet
these criteria requires that we expend significant resources. If we or our
subcontractors are unable to perform as required, we could be subject to
substantial monetary penalties and/or loss of the affected contracts which may
adversely affect our business.
We
may not be able or willing to pay future dividends.
Our
ability to pay dividends is subject to our future financial condition and
certain conditions such as continued compliance with bank covenants. Our Board
of Directors must also approve any dividends at their sole discretion. Pursuant
to our credit agreement, we may only declare quarterly or annual dividends if on
the date of declaration no event of default has occurred, no other event or
condition that upon notice or continuation would constitute a default, and
payment of the dividend will not result in a default. Unforeseen events or
situations could cause non-compliance with these bank covenants, or cause the
Board of Directors to discontinue or reduce dividend payment.
We may not be able to effectively
implement thermal desorption recycling and other new
technologies.
We expect
to continue implementing new technologies at our facilities. If we
are unable to obtain targeted revenue streams from the thermal desorption
recycling technology placed into service at Robstown, Texas facility in 2008 our
financial condition and results of operations could be adversely
impacted. Risk factors include but are not limited to changes in
market conditions including increased competition, outlets for recycled
materials, equipment malfunction, disputes with the equipment owner/operator,
the performance of the owner/operator in meeting its contractual obligations,
regulatory compliance, and equipment operation and maintenance
costs. In addition, if we are unable to identify and implement other
new technologies in response to market conditions and customer requirements in a
timely, cost effective manner, our financial condition and results of operations
could also be adversely impacted.
Integration
of potential acquisitions may impose substantial costs and delays and cause
other unanticipated adverse impacts.
Acquisitions
involve multiple risks. Our inability to successfully integrate the operations
of an acquired business into our operations could have a material adverse effect
on our business. These risks include but are not limited to:
·
changing
market conditions;
·
increased
competition;
·
the
need to spend substantial operational, financial and management resources
integrating new businesses, technologies and processes and related
difficulties integrating the operations, personnel or
systems;
·
retention
of key personnel and customers;
·
impairments
of goodwill and other intangible assets;
and
·
environmental
and other liabilities associated with past
operations.
Item
1B. Unresolved Staff Comments
None.
16
Item
2. Properties
The
following table describes our non-disposal related properties and facilities at
December 31, 2008 owned or leased by us.
Location
Segment
Function
Size
Own/Lease
Boise,
Idaho
Corporate
Corporate
office
11,492
sq. ft.
Lease
Elmore
County, Idaho
Operating
Disposal Facility
Rail
transfer station
189
acres
Own
Robstown,
Texas
Operating
Disposal Facility
Rail
transfer station
174
acres
Own
Bruneau,
Idaho
Non-operating
Disposal Facility
Former
disposal facility
83
acres
Own
Sheffield,
Illinois
Non-operating
Disposal Facility
Former
disposal facility
374
acres
Own
Winona,
Texas
Non-operating
Disposal Facility
Former
deep well facility
303
acres
Own
The
following table describes our treatment and disposal properties owned or leased
by us, total acreage owned or controlled by us at the facility, estimated amount
of permitted airspace available at each facility, the estimated amount of
non-permitted airspace and the estimated life at each facility. All estimates
are as of December 31, 2008.
Location
Own/Lease
Total
Acreage
Permitted
Airspace
(Cubic
Yards)
Non-Permitted
Airspace
(Cubic
Yards)
Estimate
Life
(in
years)
Beatty,
Nevada
Lease
80
1,594,259
-
10
Grand
View, Idaho
Own
1,411
1,234,864
28,780,000
51
Robstown,
Texas
Own
440
188,110
2,436,601
16
Richland,
Washington (1)
Sublease
100
664,339
-
47
____________________
(1)
The
Richland, Washington facility is on land subleased from the State of
Washington. Our sublease has 7 years remaining on the base term with four
10-year renewal options, giving us control of the property until the year
2055 provided that we meet our obligations and operate in a compliant
manner. The facility’s intended operating life is equal to the period of
the sublease.
Item
3. Legal Proceedings
In the
ordinary course of business, we are involved in judicial and administrative
proceedings involving federal, state or local governmental authorities. Actions
may also be brought by individuals or groups in connection with alleged
violations of existing permits, alleged damages from exposure to hazardous
substances purportedly released from our operated sites, provision of services
to customers, disputes with employees, contractors or vendors and other
litigation. We maintain insurance coverages for property and damage claims which
may be asserted against us. Periodically, management reviews and may establish
or adjust reserves for legal and administrative matters, or fees expected to be
incurred in connection therewith. As of December 31, 2008, we did not have any
ongoing, pending or threatened legal action that management believes would have
a material adverse effect on our financial position, results of operations or
cash flows.
Item
4. Submission of Matters to a Vote of Security Holders
No
matters were submitted to our security holders during the fourth quarter of
2008.
17
PART
II
Item
5. Market For Registrant’s Common Equity, Related Stockholder Matters And
Issuer Purchases Of Equity Securities
Our
common stock is listed on the NASDAQ Global Select Market under the symbol ECOL.
As of February 12, 2009 there were approximately 10,502 beneficial owners of our
common stock. High and low sales prices for the common stock for each quarter in
the last two years are shown below:
2008
2007
High
Low
High
Low
First
Quarter
$ 26.84
$ 18.51
$ 20.07
$ 17.26
Second
Quarter
$ 30.54
$ 24.50
$ 22.84
$ 18.64
Third
Quarter
$ 33.83
$ 24.73
$ 22.19
$ 18.75
Fourth
Quarter
$ 27.73
$ 14.17
$ 25.21
$ 19.85
The
following table sets forth the Company’s purchases of American Ecology common
stock made during the three months ended December 31, 2008:
The
reported periods conform to our fiscal calendar. The fourth
quarter of fiscal 2008 began on October 1, 2008 and ended on December 31,2008.
(2)
These
amounts include 825 shares of common stock surrendered to the Company from
employees who tendered shares in the fourth quarter of 2008 to satisfy
their tax withholding on equity awards under employee stock incentive
plans.
The
following graph compares the five-year cumulative total return on our common
stock with the comparable five-year cumulative total returns of the NASDAQ
Composite Index and a waste industry peer group of publicly traded companies for
fiscal year 2008. The companies which make up the selected industry
peer group are Clean Harbors, Inc; Perma-Fix Environmental Services, Inc; and
Waste Management Inc. The graph assumes that the value of the investment in AEC
common stock and each index was $100 at December 31, 2003 and assumes the
reinvestment of dividends. The chart below the graph sets forth the data points
in dollars as of December 31 of each year.
We have
paid the following dividends on our common stock ($s in thousands except per
share amounts):
2008
2007
Per
share
Dollars
Per
share
Dollars
First
Quarter
$ 0.15
$ 2,737
$ 0.15
$ 2,734
Second
Quarter
0.15
2,737
0.15
2,734
Third
Quarter
0.18
3,286
0.15
2,734
Fourth
Quarter
0.18
3,294
0.15
2,735
Total
$ 0.66
$ 12,054
$ 0.60
$ 10,937
In June
2008, we entered into a credit facility with Wells Fargo Bank that provides us
with $15.0 million of unsecured borrowing capacity and matures on June 15, 2010.
Pursuant to our credit agreement, we may only declare quarterly or annual
dividends if on the date of declaration, no event of default has occurred, or no
other event or condition has occurred that would constitute an event of default
after giving effect to the payment of the dividend. No events of
default have occurred to date.
19
Item
6. Selected Financial Data
This
summary should be read in conjunction with the consolidated financial statements
and related notes.
$s
in thousands, except for per share data
2008
2007
2006
2005
2004
Revenue
$
175,827
$
165,520
$
116,838
$
79,387
$
54,167
Business
interruption insurance claim (1)
-
-
704
901
431
Operating
income
34,521
30,867
24,458
19,432
13,148
Gain
on settlement of litigation (2)
-
-
-
5,327
-
Income
tax expense (benefit) (3)
13,735
12,322
9,979
9,676
(8,832
)
Net
income from continuing operations
21,498
19,396
15,889
15,438
22,363
Income
from discontinued operations
-
-
-
-
1,047
Net
income
21,498
19,396
15,889
15,438
23,410
Earnings
per share - basic:
Continuing
operations
$
1.18
$
1.06
$
0.88
$
0.88
$
1.30
Discontinued
operations
-
-
-
-
0.06
Net
income
$
1.18
$
1.06
$
0.88
$
0.88
$
1.36
Earnings
per share - diluted:
Continuing
operations
$
1.18
$
1.06
$
0.87
$
0.86
$
1.26
Discontinued
operations
-
-
-
-
0.06
Net
income
$
1.18
$
1.06
$
0.87
$
0.86
$
1.32
Shares
used in earnings
per
share calculation:
Basic
18,236
18,217
18,071
17,570
17,226
Diluted
18,290
18,257
18,202
17,950
17,726
Dividends
paid per share
$
0.66
$
0.60
$
0.60
0.30
$
0.25
Total
assets
$
127,712
$
117,076
$
104,041
$
89,396
$
77,233
Working
capital (4)
37,159
29,846
24,459
31,484
16,916
Long-term
debt, net of current portion
21
27
24
-
2,734
Stockholders'
equity
91,942
83,098
73,355
63,886
51,611
Return
on invested capital (5)
18.7%
17.2%
18.7%
19.5%
16.0%
(1)
Relates to insurance recoveries from a treatment building fire in
2004.
(2)
For the year ended December 31, 2005, we recognized a gain associated with
a legal settlement with the State of Nebraska.
(3) For the year ended December 31,2004 we recognized a tax benefit for the reversal of a valuation allowance
on a deferred tax asset of $14,117.
(4)
Calculated as current assets minus current liabilities.
(5)
Calculated as operating income less applicable taxes divided by the sum of
stockholders equity, long-term debt, closure and post-closure obligations,
monetized operating leases less cash and short-term
investments.
20
Item
7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
We are a
hazardous, non-hazardous and radioactive waste services company providing
treatment, disposal and transportation services to commercial and government
entities including oil refineries and chemical production facilities,
manufacturers, electric utilities, steel mills, and medical and academic
institutions. The majority of
the waste received at our facilities is produced in the United
States. We generate revenue from fees charged to treat and dispose of
waste at our four fixed disposal facilities located near Grand View, Idaho;
Richland, Washington; Beatty, Nevada; and Robstown, Texas. We also arrange
transportation of waste to our facilities, which has contributed significant
revenue in recent years. We or our predecessor companies have been in the waste
business since 1952.
Our
customers may be divided into categories to better evaluate period-to-period
changes in our treatment and disposal revenue based on service mix and type of
business (recurring “Base” or “Event” clean-up). Each of these
categories is described in the table below, along with information on the
percentage of total treatment and disposal revenues for each category in the
years ended December 31, 2008 and 2007.
Customer
Category
Description
%
of 2008
Treatment
and
Disposal
Revenue
(1)
%
of 2007
Treatment
and
Disposal
Revenue
(1)
Broker
Companies
that collect and aggregate waste from their direct customers, comprised of
both base and event clean-up business.
29%
26%
Private
Clean-up
Private
sector clean-up project waste, typically event business.
26%
30%
Government
Federal
and State government clean-up project waste, comprised of both base
business and event clean-up business.
19%
18%
Other
industry
Electric
utilities, chemical manufacturers and other industrial customers not
included in other categories, comprised of both recurring base business
and event clean-up business.
11%
10%
Rate
regulated
Northwest
and Rocky Mountain Compact customers paying rate-regulated disposal fees
set by the State of Washington, predominantly base
business.
6%
7%
Refinery
Petroleum
refinery customers, comprised of both base and event clean-up
business.
6%
5%
Steel
Steel
mill customers, comprised of both base and event clean-up
business.
3%
4%
_________________________
(1)
Excludes all transportation service revenue
A
significant portion of our disposal revenue is attributable to discrete Event
Business which varies widely in size, duration and unit pricing. For the year
ended December 31, 2008, approximately 52% of our treatment and disposal revenue
was derived from Event Business projects. The one-time nature of Event Business
and broad spectrum of waste types received and related pricing necessarily
creates variability in revenue and earnings. This variability may be influenced
by funding availability, changes in laws and regulations, government enforcement
actions, public controversy, litigation, weather, real estate redevelopment
project timing and other factors. The types and amounts of waste received from
Base Business also vary from quarter-to-quarter. As a result of this
variability, we can experience significant quarter-to-quarter and year-to-year
differences in revenue, gross profit, gross margin, operating income and net
income. Also, while many large projects are pursued months or years in advance
of work performance, both large and small clean-up project opportunities
routinely arise with little prior notice. This uncertainty, which is inherent to
the hazardous and radioactive waste disposal business, is
factored into our projections and externally communicated business outlook
statements. Our projections combine historical experience with identified sales
pipeline opportunities and new or expanded service line
projections. Management believes that the significant adverse general
economic conditions emerging in late 2008 exacerbates the uncertainty inherent
to projecting future results.
21
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 east coast (e.g. Honeywell Jersey
City project) and other locations distant from our Grand View, Idaho facility,
transportation-related revenue can account for as much as three-fourths (75%) of
total project revenue. While bundling transportation and disposal services
reduces overall gross profit as a percentage of total revenue (“gross margin”),
this value-added service has allowed us to win multiple projects that management
believes we could not otherwise have competed for successfully. Our
investment in a Company-owned railcar fleet to supplement rail cars obtained
under operating leases has reduced transportation expenses incurred when we
relied solely on operating leases and short-term rentals. The increased waste
volumes resulting from projects won through this bundling strategy have
increased operating leverage and profitability. While waste treatment
and other variable costs are project-specific, the contribution to profitability
from each new project performed generally increases as overall disposal volumes
increase. Management believes that maximizing operating income and
earnings per share is a higher priority than maintaining or increasing gross
margin. We plan to continue aggressively bidding bundled
transportation and disposal services based on this income growth
strategy.
We serve
oil refineries, chemical production plants, steel mills, waste
broker-aggregators serving small manufacturers and other customers that are, or
may be, affected by adverse economic conditions. Such conditions may cause our
customers to curtail waste production and/or delay spending on plant
maintenance, waste clean-up projects and other work. Factors that can
impact general economic conditions and the level of spending by our customers
include, but are not limited to, consumer and industrial spending, increases in
fuel and energy costs, conditions in the real estate and mortgage markets, labor
and healthcare costs, access to credit, consumer confidence and other
macroeconomic factors affecting spending behavior. Market forces may
also induce customers to reduce or cease operations, declare bankruptcy,
liquidate or relocate to other countries, any of which could adversely affect
our business. To the extent our business is either government funded
or driven by government regulations or enforcement actions, we believe it is
less susceptible to general economic conditions, however, spending by government
agencies may be also be reduced due to declining tax revenues that may result
from a general deterioration in economic conditions. Adverse macro-economic
trends arising in the second half of 2008 and continuing into 2009 indicate a
decrease in near-term demand for our services from industrial production and
manufacturing activities. Such conditions also impact spending on real estate
“brownfield” redevelopment projects and other discretionary industry clean-up
projects. We have tightened our credit standards in response to these
trends, which may also impact our business. Demand for our services
may benefit from greater emphasis on enforcement by the new administration as
well as increased federal funding for environmental remediation, including the
American Recovery and Reinvestment Act of 2009.
Overall
Performance
On a
consolidated basis, our financial performance for the year ended December 31,2008 (“2008”) improved over the years ended December 31, 2007 (“2007”) and
December 31, 2006 (“2006”). We believe these results demonstrate the success of
strategies employed to expand both our recurring Base and Event clean-up
projects business through aggressive pricing, expanded service offerings
(including rail transportation) and increased waste throughput capacity, while
devoting sustained attention to cost control, safety, regulatory compliance and
customer service excellence.
A
significant portion of our disposal revenue is derived from government Event
clean-up projects, which are primarily driven by federal, state and (to a lesser
extent) local government appropriations. Government Event projects include
federal Superfund projects which, like other remediation work, depend on
project-specific funding. In recent years, a larger number of Superfund projects
have been funded by potentially liable private parties as the amount of
government funding has decreased. Management believes that the change in federal
administrations and composition of the Congress may result in increased
appropriations for environmental clean-up work managed by multiple federal
agencies.
We have a
contract with the USACE to provide disposal services for the USACE FUSRAP
clean-up program. The current USACE contract expires in 2009, however,
multi-year projects underway before the expiration date may continue for five
years under the same terms. The USACE generally expects the federal clean-up
program which funds the contract to continue through approximately 2018. Given
our current level of service to the USACE, we believe follow-on contracting is
likely. From
time to time the USEPA and other federal agencies use our contract to dispose of
Superfund and other federal clean-up waste. Annual FUSRAP funding has remained
generally constant. In 2008, USACE revenue was approximately 6% of total revenue
as compared to 7% and 10% of total revenue in 2007 and 2006,
respectively.
We
believe that private sector remediation projects are driven by economic
conditions, regulatory agency enforcement actions and settlements including
regulatory enforcement actions, judicial proceedings, availability of private
funds, post-remediation real estate redevelopment plans and other
factors. During economic downturns, management believes that
privately-funded remediation projects that are not driven by enforcement actions
are more likely to be delayed than when the economy is healthy. The economic
condition of a specific industry category (e.g. refinery or steel mill
production) is also relevant, however, as is the financial condition of specific
customers. We serve multiple private clean-up efforts on an ongoing
basis. The revenue and gross margin for individual projects vary considerably
depending on the amount of waste shipped to our disposal sites, the rate at
which the waste is shipped and unit pricing.
22
In 2005,
we entered into a large project contract with Honeywell to transport, treat and
dispose approximately 1.2 million tons of chromite ore processing residue.
Treatment of metals-bearing waste is generally a commoditized service and we
believe we earned this business through a combination of our high volume waste
throughput capability, the superior environmental conditions present at our site
in the Owyhee Desert of southwestern Idaho and competitive pricing for
bundled transportation and disposal services. Initial Honeywell shipments were
received at our Grand View, Idaho facility in July 2005. Honeywell revenue was
43%, 41% and 38% of our total revenue in 2008, 2007 and 2006, respectively. As
of December 31, 2008 Honeywell has shipped and we have disposed of approximately
1 million tons under our contract. We expect that the project will be
completed in 2009.
We have
historically treated and disposed of K061 from steel mills from multiple states
at our Grand View, Idaho facility. In 2008, steel mill Base Business revenue
decreased 29% from 2007. This decline was a result of increased competition from
zinc recycling companies offering an alternative to disposal as well as reduced
steel mill production levels in the second half of 2008.
We have
been successful in securing new Base Business contracts from hazardous waste
generators and brokers, and employ a sales incentive plan that rewards Base
Business revenue. During 2008, we increased Base Business revenue by 8% over
2007 levels. Base Business revenue was approximately 48% of total 2008 treatment
and disposal revenue, down slightly from just over 48% in 2007. The hazardous
waste business is highly competitive and no assurance can be given that we will
maintain these Base Business revenue levels or to increase our market
share.
2006 to
2008 year-to-year comparisons are affected by multiple significant events
including, but not limited to:
·
Adjustments
in amounts reserved for future closure and post-closure costs at operating
and non-operating hazardous waste facilities in 2008 based on updated cost
estimates and timing of closure and post-closure cost
activities.
·
Increased
amounts reserved for future closure and post-closure costs at
non-operating hazardous waste facilities in 2006 and 2007 for increased
closure cost estimates, acceleration of closure projects and changes in
estimated inflation rates.
·
Settlement
of a business insurance interruption claim in the third quarter of
2006.
These
events are discussed in detail below.
2008
Events
Operating and Non-operating facility
closure expenses: In 2008, we recognized a favorable
adjustment of $857,000 based on written confirmation from the State of Nevada
that cash contributed by the Company and held in a dedicated State account
maintained to satisfy closure and post-closure obligations at our Beatty, Nevada
facility can be used to fund interim closure work carried out by the
Company. We also recognized favorable adjustments of approximately
$230,000 related to changes in cost estimates to close our operating and
non-operating sites and perform post-closure monitoring. Partially
offsetting these favorable adjustments was a charge of $164,000 primarily
related to higher than estimated costs incurred in 2008 to grout and close the
remaining deep well at our non-operating Winona, Texas facility.
2007
Events
Operating and Non-operating facility
closure expenses: In 2007, we incurred $394,000 of expenses
related to changes in closure cost estimates to close our operating and
non-operating sites and perform post-closure monitoring activities. These
increases in estimates were primarily a result of higher petroleum-based
disposal cell liner material costs and soil excavation and placement costs which
had escalated faster than the rate of inflation.
2006
Events
Business interruption
proceeds: We filed business interruption claims with our insurance
carrier following a 2004 fire in our Robstown, Texas facility’s waste treatment
building. In 2006, we agreed on a final settlement of these claims for
approximately $2.1 million, of which $1.3 million was previously recognized.
After deducting $34,000 for claim preparation expenses, a $704,000 operating
income gain was recognized.
Non-operating facility closure
expenses: In 2006, we took a $235,000 charge at our non-operating
facilities in Winona, Texas and Sheffield, Illinois. These charges reflect
acceleration of closure work at our Winona, Texas deep-well facility and changes
in inflation rates at both facilities for the closure post-closure
period.
23
Results
of Operations
The below
table summarizes our operating results and percentage of revenues for the years
ended December 31, 2008, 2007 and 2006.
$s
in thousands
2008
%
2007
%
2006
%
Revenue
$
175,827
100.0%
$
165,520
100.0%
$
116,838
100.0%
Transportation
costs
82,064
46.7%
79,326
47.9%
47,829
40.9%
Other
direct operating costs
44,322
25.2%
40,681
24.6%
32,420
27.8%
Gross
profit
49,441
28.1%
45,513
27.5%
36,589
31.3%
Selling,
general and
administrative
expenses
14,920
8.5%
14,646
8.8%
12,835
11.0%
Business
interruption insurance claim
-
-
(704
)
-0.6%
Operating
income
34,521
19.6%
30,867
18.7%
24,458
20.9%
Other
income (expense)
Interest
income
413
0.2%
732
0.4%
831
0.7%
Interest
expense
(7
)
(3
)
(8
)
Other
306
0.2%
122
0.1%
587
0.5%
Total
other income
712
0.4%
851
0.5%
1,410
1.2%
Income
before income tax
35,233
20.0%
31,718
19.2%
25,868
22.1%
Income
tax expense
13,735
7.8%
12,322
7.5%
9,979
8.5%
Net
income
$
21,498
12.2%
$
19,396
11.7%
$
15,889
13.6%
Segments
We
operate within two segments, Operating Disposal Facilities and Non-operating
Disposal Facilities, which are combined with our discontinued Processing
operations and with Corporate to arrive at consolidated income. Only the
Operating Disposal Facilities segment reports significant revenue and profits.
Non-operating Disposal Facilities generate virtually no revenue and no profit.
Corporate generates no revenue and provides administrative, management and
support services to the other segments. Income taxes are assigned to Corporate.
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. Detailed financial information for our reportable
segments can be found in Note 15 of the consolidated financial statements under
Item 8 - Financial Statements and Supplementary Data to this Form
10-K.
2008
Compared to 2007
Revenue. Revenue
increased 6% to $175.8 million for 2008, up from $165.5 million for
2007. This increase was primarily attributable to increased treatment
and disposal revenue driven by an 8% increase in Base business revenue and a 10%
increase in Event business revenue in 2008 compared to 2007. The
increase is also partially attributable to higher revenue from transportation
services on bundled rail transportation and disposal contracts. During 2008, we
disposed of 1.2 million tons of hazardous and radioactive waste, up 7% from 1.1
million tons disposed in 2007. Our average selling price for treatment and
disposal services (excluding transportation) in 2008 was 4% higher than our
average selling price in 2007. Management believes this reflects
normal variations in service mix that are inherent to the business.
During
2008, treatment and disposal revenue from recurring Base Business grew 8% and
represented 48% of non-transportation revenue in 2008 and 2007. Base Business
revenue increased in 2008 as a result of strong growth in our broker and other
industry business categories. Event Business revenue was 10% higher in 2008 than
in 2007, and represented 52% of our non-transportation revenue in both 2008 and
2007. Event Business growth was attributable to higher disposal revenue from
waste broker, government clean-up and refinery customers.
24
The
following table summarizes revenue growth (both Base and Event Business) by
industry customer type for 2008 as compared to 2007.
Treatment
and Disposal Revenue Growth
2008
vs. 2007
Broker
23%
Other
industry
22%
Refinery
19%
Government
17%
Private
-5%
Rate
regulated
-10%
Steel
-21%
Our
broker business increased 23% in 2008 compared to 2007, reflecting continued
success teaming with national and regional waste broker companies that do not
compete with us. Waste brokered to us for treatment and recycling
during the second half of 2008 at the thermal desorption unit installed at our
Robstown, Texas facility contributed to this growth.
Our other
industry revenue category increased 22% in 2008 compared to 2007. This increase
was due primarily to a large PCB waste clean-up for an electric utility customer
shipped to our Grand View, Idaho facility in early 2008 and increased shipments
from new Base Business customers.
Treatment
and disposal revenue from refinery customers grew 19% in 2008 as compared to
2007. This growth is primarily attributable to a contaminated soil cleanup
project shipped to our Idaho facility in 2008 and the introduction of our
thermal desorption recycling service in Texas in the second half of
2008.
Government
clean-up business revenue increased 17% in 2008 over 2007. This increase
reflects a state-funded contaminated soil clean-up project shipping to our
Robstown, Texas and Beatty, Nevada facilities in 2008 and increased shipments
from military base clean-ups by the Department of Defense. These increases were
partially offset by reduced waste disposal shipments from the USACE in 2008 as
compared with 2007. This reduction reflects timing as task orders are completed
and new task orders commenced as well as a higher percentage of available
appropriations being spent by the USACE on transportation due to higher fuel
charges. Including rail transportation services provided to the USACE, total
revenue under the USACE contract contributed 6% of total revenue in 2008, or
$11.4 million, as compared to 7% of total revenue in 2007, or $12.2
million.
Treatment
and disposal revenue from private clean-up customers decreased approximately 5%
during 2008 over the same period last year. The Molycorp project which is
nearing completion was partially responsible for this
decline. Molycorp contributed 5% of total revenue (including
transportation), or $9.6 million in 2008 as compared to 9% of total revenue
(including transportation), or $14.5 million in 2007. The decrease is
also partially attributable to shipments to our Beatty, Nevada facility from a
large brownfield redevelopment project competed in 2007. These
decreases were partially offset by increased shipments from the Honeywell Jersey
City project. Including both transportation and disposal revenue, Honeywell
contributed 43% of total revenue for 2008, or $76.4 million. This compares to
41% of total revenue (including transportation) for 2007, or $67.9
million.
Rate-regulated
business at our Richland, Washington low-level radioactive waste facility
decreased 10% in 2008 over 2007. Our Richland facility operates under a
State-approved revenue requirement established a new, six year rate which took
effect in 2008. The 2008 decrease primarily reflects a lower revenue
requirement in 2008 than the previous rate agreement in effect for
2007. The current rate agreement provides for annual rate adjustments
based on a specified inflation index.
Treatment and disposal
revenue from our steel mill customers decreased 21% during in 2008 compared to
2007. This decline was a result of business lost to zinc recyclers
offering an alternative to disposal as well as reduced steel production levels
in the second half of 2008 at mills served by the Company.
25
Gross Profit. Gross profit in 2008
increased by 9% to $49.4 million, up from $45.5 million in 2007. This increase
was attributable to increased waste volumes disposed of in 2008 as compared to
2007 and net favorable adjustments of $923,000 in our closure and post-closure
obligations recorded in 2008. During 2008, we received written
confirmation from the State of Nevada that cash contributed by us and held in a
dedicated state account to satisfy closure and post-closure obligations at our
Beatty, Nevada hazardous waste disposal facility can be used to fund interim
closure work. As a result, an $857,000 obligation previously recorded
for closure activities at the Beatty, Nevada facility was removed. The remaining
$66,000 of net favorable adjustment reflects year-end cost estimate revisions
for closure activities and post-closure obligations at our Grand View, Idaho
facility and non-operating Sheffield, Illinois facility, partially offset by
increased costs to close our deep-well injection system at our non-operating
facility in Winona, Texas. Gross margin
was 28% for both 2008 and 2007.
Treatment
and disposal gross margin (excluding transportation services) was 52% of
treatment and disposal revenue in 2008 compared to 53% of treatment and disposal
revenue in 2007. The service mix of waste received at our facilities can have a
significant impact on our gross margin on a period-to-period basis. Treatment of
metals-bearing hazardous wastes, such as the Honeywell Jersey City chromite ore
waste, is a commoditized service with lower gross margins than other waste
materials that require no treatment prior to disposal or higher margin niche
treatment services such as treatment of waste containing organic chemical
compounds and radioactive material disposal.
Use of additives to meet
USEPA treatment standards is a variable cost dependent on the type of waste
treated. Except for disposal unit airspace, treatment additives and (to a
much lesser degree) employee overtime and energy costs, most other direct costs
are fixed and do not significantly vary with changes in waste volume. This
highlights the operating leverage benefits of the disposal business. Management
focuses on earnings growth rather than gross margin, since increased gross
margin could result in lower waste throughput, reduced operating leverage and
lower gross profit.
During
2007 gross profit and gross margin were reduced by approximately $394,000 for
charges related to closure and post-closure expenses at our operating and
non-operating facilities in Robstown and Winona, Texas and Sheffield,
Illinois.
Selling, General
and Administrative (“SG&A”). SG&A expenses
as a percentage of total revenue declined to 8% in 2008 as compared to 9%
in 2007. In total dollars, SG&A expenses increased 2% to $14.9 million in
2008, up from $14.6 million in 2007. The increase in SG&A
expenses was due to higher payroll and benefit expenses, bad debt expense and
stock and performance based compensation expense. The increase also
reflects $129,000 of business development expenses on an acquisition opportunity
the Company elected not to pursue during the year.
Interest income
and expense. Interest income is
earned on cash balances and short-term investments and is a function of
prevailing market rates and balances. In 2008, we earned $413,000 of
interest income, down from $732,000 in 2007. This decrease was due to a lower
average rate of interest earned on investments in 2008 compared to 2007,
partially offset by higher average balances of cash equivalents and short-term
investments in 2008.
Other income
(expense). Other income (expense) includes business activities not
included in current year ordinary and usual revenue and expenses. In
2008, we recognized $306,000 in other income primarily for royalty income from a
previously sold municipal waste landfill in Texas. Other income in 2007 was
$122,000, primarily from a $26,000 net gain on sale of excess property
associated with our discontinued operation in Winona, Texas and $88,000 in
royalty income from the Texas municipal landfill.
Income tax
expense. Our
effective income tax rate for the years ended December 31, 2008 was 39.0%
compared to 38.8% in 2007. The lower 2007 effective tax rate reflects the
realization of approximately $325,000 in state investment tax credits on our
filed income tax returns.
As of
December 31, 2008, we had approximately $72.4 million in state net operating
loss carry forwards (“NOLs”) for which we maintain nearly a full valuation
allowance. These state NOLs are located in states where we currently do little
or no business, and consider it unlikely that we will utilize these NOLs in the
future.
As of
December 31, 2008 and 2007, we had no unrecognized tax benefits. We
recognize interest assessed by taxing authorities as a component of interest
expense. We recognize any penalties assessed by taxing authorities as
a component of selling, general and administrative expenses. Interest
and penalties for both 2008 and 2007 were not material.
26
2007
Compared to 2006
Revenue. Revenue
increased 42% to $165.5 million for 2007, up from $116.8 million for
2006. This increase reflects higher revenue from transportation
services on bundled rail transportation and disposal contracts and increased
treatment and disposal revenue at our Idaho, Nevada, and Texas operations.
During 2007, we disposed of 1.1 million tons of hazardous and radioactive waste
in our landfills, up 36% from the 816,000 tons disposed in 2006. Our average
selling price for treatment and disposal services (excluding transportation) in
2007 was 1% lower than our average selling price in 2006 reflecting normal
variations in service mix that are inherent to the business.
During
2007, treatment and disposal revenue from recurring Base Business grew 19% and
represented 48% of non-transportation revenue, as compared to 49% of
non-transportation revenue for 2006. Base Business revenue increased in 2007 as
a result of strong growth in our broker, refinery and rate regulated business
categories. Event Business revenue was 31% higher in 2007 than in 2006 and
represented 52% of our non-transportation revenue. Event Business growth was due
to higher disposal revenue from both private industry and federal cleanup
customers.
The
following table summarizes revenue growth for 2007 (both Base and Event
Business) by industry customer type as compared to 2006.
Treatment
and Disposal Revenue Growth
2007
vs. 2006
Private
93%
Refinery
48%
Government
30%
Rate
regulated
15%
Steel
12%
Broker
14%
Other
industry
-31%
Treatment
and disposal revenue from private cleanup customers grew approximately 93%
during 2007 over 2006. The Honeywell Jersey City project was primarily
responsible for this growth. Including transportation and disposal revenue,
Honeywell contributed 41% of total revenue, or $67.9 million. This compares to
38% of total revenue (including transportation) in 2006, or $44.3
million. This increase was partially due to a temporary suspension of
Honeywell shipments affecting the first quarter of 2006. Other contributors to
this revenue growth include the Molycorp, Pennsylvania project which began
shipments to our Grand View, Idaho site in April 2007 and a private brownfield
redevelopment project in Arizona completed in the first half of 2007 by our
Beatty, Nevada site. Each of these projects included significant bundled truck
or rail transportation revenue.
Treatment
and disposal revenue from our refinery customers grew 48% in 2007 as compared to
2006. This growth was driven by strong production and maintenance cycles from
petroleum refinery customers.
Federal
government cleanup business revenue increased 30% in 2007 over 2006. This
reflects increased shipments from a California military base clean-up project
shipped to our Beatty, Nevada facility, as well as a steady flow of shipments to
our Grand View, Idaho facility under our USACE contract. Event Business clean-up
work under the USACE contract contributed 7% of total revenue for 2007, or $12.2
million, compared to
10% or $11.6 million in 2006.
Rate-regulated
business at our Richland, Washington low-level radioactive waste facility
increased 15% in 2007 over 2006. This increase reflected an inflation adjustment
to our state-approved annual revenue requirement for the year and revenue from
our field services group.
Treatment
and disposal revenue from our steel mill customers grew 12% in 2007 compared to
2006 as a result of a radioactive material clean-up project at one mill and
steady Base Business shipments.
Our
broker business increased 14% in 2007 compared to 2006, reflecting continued
success teaming with national and smaller regional waste broker companies that
do not compete with us for disposal business.
Our other
industry revenue declined 31% in 2007 compared to 2006. This decline was due to
a large non-rate regulated project completed by our Richland, Washington
facility in 2006 that was partially, but not entirely replaced in
2007.
27
Gross
Profit. Gross profit in 2007
increased by 24% to $45.5 million, up from $36.6 million in 2006. This increase
reflects the significantly higher volume of waste disposed in 2007 compared to
2006 and resulting operating leverage. Gross margin decreased to 28% for 2007 as
compared to 31% for 2006. The decrease in gross margin was due to higher rail
and truck transportation services provided on the Honeywell Jersey City and
Molycorp Pennsylvania projects and other bundled transportation and disposal
services.
Treatment
and disposal gross margin (excluding transportation services) in both 2007 and
2006 was 53% of treatment and disposal revenue. The mix of waste received at our
facilities, excluding transportation factors, can have a significant impact on
our gross margin on a period-to-period basis. Treatment of metals-bearing
hazardous wastes, such as the Honeywell Jersey City chromite ore waste, is a
commoditized service with lower gross margins than other waste materials that
require no treatment prior to disposal or higher gross margin niche treatment
services such as treatment of waste containing organic chemical compounds and
radioactive waste disposal.
Use of additives to meet
USEPA treatment standards is a variable cost dependent on the specific waste
treated. Except for disposal unit airspace, treatment additives and (to a
much lesser degree) employee overtime and energy costs, most other direct costs
are fixed and do not significantly vary with changes in waste volume. This
highlights the operating leverage benefits of the disposal business. Management
focuses on earnings growth rather than gross margin, since higher gross margin
could result in lower waste throughput, reduced operating leverage and lower
gross profit.
During
2007 we received higher volumes of commoditized metals-bearing waste from our
Honeywell Jersey City contract as well as higher volumes of radioactive material
driven by our Molycorp Pennsylvania contact. Gross profit and gross margin were
adversely impacted by approximately $394,000 for a charge for closure and
post-closure expenses at our operating and non-operating facilities in Robstown
and Winona, Texas and Sheffield, Illinois. In 2006, gross margin was improved
due to a high margin, non-rate regulated direct disposal project at our
Richland, Washington facility completed in 2006. Gross profit and gross margin
were adversely impacted in 2006 by approximately $235,000 for accelerated
closure expenses at our non-operating facilities in Winona, Texas and Sheffield,
Illinois.
Selling, General
and Administrative (“SG&A”). SG&A expenses
as a percentage of total revenue declined to 9% in 2007 as compared to
11% in 2006. In total dollars, SG&A expenses increased 14% to $14.6 million
in 2007, up from $12.8 million in 2006. The increase in SG&A expense was due
primarily to increased business activity, higher incentive compensation, sales
commissions, stock-based compensation expense, bad debt expense and
administrative costs in support of the higher waste volumes received.
Additionally, 2007 SG&A expense included a $203,000 charge for the write-off
of engineering costs previously capitalized for a New Jersey rail transload
project that was discontinued.
Interest income
and expense. Interest income is
earned on cash balances and short-term investments and is a function of
prevailing market rates and balances. In 2007, we earned $732,000 of
interest income, down from $831,000 in 2006. This decrease was due to lower
average balances of cash equivalents and short-term investments in 2007 compared
to 2006, partially offset by a higher average rate of interest earned on
investments.
Other
income (expense). Other
income/expense is used to record business activities that are not a part of
current year ordinary and usual revenue and expenses. Other income in 2007 was
$122,000 and primarily resulted from a $26,000 net gain on sale of excess
property associated with our discontinued Winona, Texas facility and $88,000 in
royalty income on a former municipal landfill that was sold. Other
income in 2006 was $587,000 from a $299,000 reimbursement of legal expenses on a
prior year litigation matter, a $167,000 net gain on sale of excess property in
Winona, Texas, $53,000 in royalty payments from the Texas landfill, $50,000 in
proceeds from an easement agreement and $18,000 of other miscellaneous
income.
Income tax
expense. Our
effective income tax rate for the years ended December 31, 2007 and 2006 was
38.8% and 38.6%, respectively. This increase is due primarily to a 1% increase
in our federal statutory rate in 2007 from 34% to 35% on higher earnings,
increases in non-tax-deductible expenses on incentive stock options and
increases in our estimated state income tax rate. These increases
were partially offset by realization of approximately $325,000 in state
investment tax credits claimed on our 2006 tax returns. At December 31, 2007, we
also had approximately $64.8 million in state NOLs for which we maintain nearly
a full valuation allowance. These state NOLs are located in states where we
currently do little or no business and we consider it unlikely we will be able
to utilize them in the future.
28
Liquidity
and Capital Resources
Our
principal source of cash is from operations. The $18.5 million in cash and cash
equivalents at December 31, 2008 was comprised of cash immediately available for
operations.
We have a
$15.0 million unsecured revolving line of credit (the “Revolving Credit
Agreement”) with Wells Fargo Bank, National Association (“Wells
Fargo”). This Revolving Credit Agreement expires on June 15, 2010.
The unsecured line-of-credit is available to supplement daily working capital as
needed. Monthly interest-only payments are required on outstanding debt levels
based on a pricing grid, under which the interest rate decreases or increases
based on our ratio of funded debt to earnings before interest, taxes,
depreciation and amortization. We can elect to borrow monies utilizing LIBOR
plus an applicable spread or the prime rate. At December 31, 2008, the
applicable interest rate on the line of credit was 1.04% The credit
agreement contains certain quarterly financial covenants, including a maximum
leverage ratio, a maximum funded debt ratio and a minimum required tangible net
worth. Pursuant to our credit agreement, we may only declare quarterly or annual
dividends if on the date of declaration, no event of default has occurred, or no
other event or condition has occurred that would constitute an event of default
after giving effect to the payment of the dividend. At December 31, 2008 we were
in compliance with all financial covenants in the credit agreement. We have a
standby letter of credit to support our closure and post-closure obligation of
$4.0 million that expires in September 2009. At December 31, 2008, we had a
borrowing capacity of $11.0 million after deducting the outstanding letter of
credit, with no borrowings outstanding.
On
October 28, 2008, our Board of Directors authorized management to repurchase up
to 600,000 shares, or approximately 3%, of our outstanding common stock. On
December 11, 2008, the program was extended until February 28, 2009. On February23, 2009, the program was extended until December 31, 2009 unless extended,
canceled or modified by our Board of Directors. The authorization does not
obligate the Company to acquire any particular amount of common stock and will
be executed at management’s discretion within Board-established stock price
limits. As of December 31, 2008, the Company has purchased 155,175 shares under
the plan at an average price of $16.68 per share using cash on
hand. We anticipate funding any future repurchases with cash on
hand.
We
believe that cash on hand and cash flow from operations will be sufficient to
meet our operating cash needs during the next 12 months.
Operating
Activities. In 2008, cash provided by
operating activities was $30.6 million. This was primarily attributable to net
income of $21.5 million, depreciation, amortization and accretion of $10.6
million and changes in deferred income taxes. These amounts were partially
offset by decreases in closure and post-closure obligations of $1.9 million, a
decrease in accounts payable and accrued liabilities of $1.8 million, increases
in income tax receivables of $1.8 million, and increases in accounts receivable
(net of the increase in deferred revenue) of $1.1 million. The increase
in net income is discussed above under Results of Operations. The
decrease in closure and post-closure obligations was due primarily to the
removal of the closure obligation related to our Beatty, Nevada facility and
payments made on our closure and post-closure obligations. The
decrease in accounts payable and accrued liabilities is primarily attributable
to reimbursements related to our rate-regulated business in Richland,
Washington. The increase in tax receivables was the result of
accelerated tax deductions related to bonus depreciation, accelerated
amortization of cell space and other tax planning strategies. The
increase in accounts receivable was primarily attributable to revenue
growth. Days sales outstanding increased to 66 days as of December31, 2008 compared to 65 days as of December 31, 2007.
In 2007,
cash provided by operating activities was $30.7 million. This was primarily
attributable to net income of $19.4 million, changes in deferred tax of $2.9
million, accrued salaries and benefits and stock based compensation. These
amounts were partially offset by increases in accounts receivable (net of the
increase in deferred revenue) of $851,000, a decrease in accounts payable and
accrued liabilities of $659,000 and payments to meet closure post-closure
obligations. The
increase in net income is discussed above under Results of
Operations. During 2007, we fully utilized our
federal NOLs and began using cash to pay our tax obligations. The
increase in accounts receivable reflects higher disposal and transportation
revenue for 2007 as compared to 2006. Longer payment terms for the Honeywell
Jersey City project contributed to the increase in accounts receivable in 2007,
during which days sales outstanding increased to 65 days as of December 31,2007, compared to 61 days at December 31, 2006.
29
In 2006,
cash provided by operating activities was $20.7 million. This was primarily
attributable to net income of $15.9 million, utilization of deferred tax assets
and income tax receivable totaling $7.3 million, an increase in accounts payable
and accrued liabilities of $1.6 million and a decrease in other assets. These
amounts were partially offset by increases in accounts receivable (net of the
increase in deferred revenue) of $11.6 million, a decrease in accrued salaries
and benefits of $606,000 and payments on our closure post-closure obligations.
During 2006, we utilized $17.4 million of our NOLs, resulting in a reduction of
our deferred tax assets. Increases in accounts payable and accrued liabilities
reflect increased business activity and timing of payments. Decreases in other
assets reflect prepaid transportation and insurance. Increases in accounts
receivable reflect revenue growth. The Honeywell Jersey City project represented
approximately 49% of our outstanding trade accounts receivable balance at
December 31, 2006. Due to the size of the Honeywell contract and its extended
payment terms, our average days outstanding for receivables increased in 2006 as
compared to 2005.
Investing
Activities. In
2008, net cash used in investing activities was $11.2 million. We spent $13.6
million in capital expenditures, including $3.5 million to construct additional
disposal capacity at our Beatty, Nevada facility, $3.8 million for additional
disposal capacity at our Robstown, Texas facility and an additional $2.8 million
at the Texas facility on infrastructure for the thermal desorption recycling
equipment installed at that operation. Other capital projects included equipment
and fixture purchases at all four operating waste
facilities. Partially offsetting cash outflows for capital
expenditures were net maturities of short-term investments totaling $2.2
million.
In 2007,
net cash used in investing activities was $11.5 million. During 2007, capital
expenditures totaled $15.4 million, primarily for construction of a new
treatment and storage building at our Beatty, Nevada facility for $4.3 million;
a new storage building and waste testing laboratory at our Robstown, Texas
facility for $1.3 million; construction of additional disposal space at our
Idaho and Texas facilities for $6.0 million and various equipment and fixture
purchases at all four operating waste facilities. Partially offsetting cash
outflows for capital expenditures were net maturities of short-term investments
totaling $4.1 million.
For 2006,
net cash used in investing activities was $13.8 million including capital
expenditures of $19.8 million. Of this amount, $11.9 million was used to
purchase additional gondola rail cars, $1.9 million to construct a second rail
transfer station and additional rail track at our Grand View, Idaho rail
transfer station and $2.0 million to construct a new rail transfer station near
our Robstown, Texas facility. During 2006, we funded a $4.5 million trust
account securing our closure post-closure financial assurance obligations at our
non-operating facilities. Net short-term investment activity provided $10.4
million in cash during 2006.
Financing
Activities. For 2008, net cash used in financing
activities was $13.5 million. This included $12.1 million in dividend
payments and $2.6 million used for common stock repurchases. The dividend
payments and common stock repurchases were partially offset by proceeds received
from stock option exercises and associated tax benefits.
For 2007,
net cash used in financing activities was $10.4 million. This was primarily
attributable to $10.9 million in dividend payments partially offset by proceeds
from stock option exercises and associated tax benefits.
For 2006,
net cash used in financing activities was $6.8 million. This included dividend
payments of $10.8 million, partially offset by $2.0 million from the exercise of
stock options and a $2.0 million in associated tax benefits.
AEC’s
contractual obligations at December 31, 2008 mature as
follows:
Payments
Due by Period
1
Year
More
than
$s
in thousands
Total
or
less
2-3
Years
4-5
Years
5
Years
Closure
and post-closure obligations (1)
$
126,638
$
533
$
3,367
$
3,312
$
119,426
Operating
lease commitments
3,423
2,082
1,027
191
123
Capital
lease obligation
35
13
19
3
-
Total
contractual obligations
$
130,096
$
2,628
$
4,413
$
3,506
$
119,549
______________________
(1)
For
the purposes of the table above, our closure and post-closure obligations
are shown on an undiscounted basis and inflated using an estimated annual
inflation rate of 2.6%. Cash payments for closure and post-closure
obligation extend to the year 2103.
Guarantees
We enter into a
wide range of indemnification arrangements, guarantees and assurances in the
ordinary course of business and have evaluated agreements that contain
guarantees and indemnification clauses in accordance with Financial Accounting
Standards Board (“FASB”) Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of Others.
These include tort indemnities, tax indemnities, indemnities against third-party
claims arising out of arrangements to provide services to us and indemnities
related to the sale of our securities. We also indemnify individuals
made party to any suit or proceeding if that individual was acting as an officer
or director of AEC or was serving at the request of AEC or any of its
subsidiaries during their tenure as a director or officer. We also provide
guarantees and indemnifications for the benefit of our wholly-owned subsidiaries
to satisfy performance obligations, including closure and post-closure financial
assurances. It is difficult to quantify the maximum potential liability under
these indemnification arrangements; however, we are not currently aware of any
material liabilities arising from these arrangements.
Environmental
Matters
We
maintain reserves and insurance policies for future closure and post-closure
obligations at both current and formerly operated disposal facilities. These
reserves and insurance policies are based on management estimates of future
closure and post-closure monitoring using engineering evaluations and interpretations of
regulatory requirements which are periodically updated. Accounting for
closure and post-closure costs includes final disposal unit capping, soil and
groundwater monitoring and routine maintenance and surveillance required after a
site is closed.
We
estimate that our undiscounted future closure and post-closure costs for all
facilities was approximately $127 million at December 31, 2008, with a median
payment year of 2056. Our future closure and post-closure estimates are our best
estimate of current costs and are updated periodically to reflect current
technology, cost of materials and services, applicable laws, regulations and
permit conditions or orders and other factors. These current costs are adjusted
for anticipated annual inflation or cost of living rates, which we assumed to be
2.6% as of December 31, 2008. These future closure and post-closure estimates
are discounted to their present value for financial reporting purposes using our
credit-adjusted risk-free interest rate, which approximates our incremental
borrowing rate in effect at the time the obligation is established or when there
are upward revisions to our estimated closure and post-closure costs. At
December 31, 2008, our weighted-average credit-adjusted risk-free interest rate
was 8.1%. For financial reporting purposes, our recorded closure and
post-closure obligations were $14.5 million, $15.1 million and $12.8 million for
2008, 2007 and 2006, respectively.
Through
December 31, 2008, we have met our financial assurance requirements through
insurance and self-funded restricted trusts. Our current closure and
post-closure policies were renewed in December 2005 and expire in December 2009.
This renewal required us to self-fund $4.5 million of closure and post-closure
obligation for non-operating sites subject to approval by responsible regulatory
agencies. During 2006, the responsible regulatory agencies approved the use of
the self-funded trust agreements in place of insurance policies. As a result,
our non-operating site insurance policies were cancelled during
2006.
31
We are
also required to provide collateral equal to 15% of the insurance policy limits
for operating site closure and post-closure obligations through the remainder of
the policy term. As of December 31, 2008, we have issued $4 million in letters
of credit to satisfy this collateral requirement with limits of approximately
$33 million for our operating sites. We also have $4.7 million in self-funded
restricted trust agreements to cover financial assurance obligations at our
non-operating facilities. These self-funded trust agreements are identified as
“Restricted Cash” on our consolidated balance sheet.
We expect
to renew these policies in the future. If we are unable to obtain
adequate closure, post-closure or environmental liability insurance in future
years, any partial or completely uninsured claim against us, if successful and
of sufficient magnitude, could have a material adverse effect on our financial
condition, results of operations or cash flows. Additionally, continued access
to casualty and pollution legal liability insurance with sufficient limits, at
acceptable terms, is important to obtaining new business. Failure to maintain
adequate financial assurance could also result in regulatory action including
early closure of facilities. While we believe we will be able to maintain the
requisite financial assurance policies at a reasonable cost, premium and
collateral requirements may materially increase.
Operation
of disposal facilities creates operational, closure and post-closure obligations
that could result in unplanned monitoring and corrective action costs. We cannot
predict the likelihood or effect of all such costs, new laws or regulations,
litigation or other future events affecting our facilities. We do not believe
that continuing to satisfy our environmental obligations will have a material
adverse effect on our financial condition or results of operations.
Seasonal
Effects
Market
conditions and federal funding decisions generally have a larger effect on
revenue than does seasonality. Operating revenue is generally lower in the
winter months, however, and increases when short-term, weather-influenced
clean-up projects are more frequently undertaken. While large, multi-year
clean-up projects tend to continue in winter months, the pace of waste shipments
may be slowed due to weather.
Critical
Accounting Policies
Our
discussion and analysis of our financial condition and results of operations are
based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States.
The preparation of these financial statements require us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses and related disclosure of contingent assets and liabilities. On an
ongoing basis, we evaluate our estimates included in our critical accounting
policies discussed below and those accounting policies and use of estimates
discussed in Notes 2 and 3 to our consolidated financial statements. We base our
estimates on historical experience and on various assumptions and other factors
we believe to be reasonable, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. We make adjustments to judgments and
estimates based on current facts and circumstances on an ongoing basis.
Historically, actual results have not significantly deviated from those
determined using the estimates described below or in Notes 2 and 3 to the
consolidated financial statements. However, actual amounts could differ
materially from those estimated at the time the consolidated financial
statements are prepared.
We
believe the following critical accounting policies are important to understand
our financial condition and results of operations and require management’s most
difficult, subjective or complex judgments, often as a result of the need to
estimate the effect of matters that are inherently uncertain.
Revenue
Recognition
We recognize revenue when
persuasive evidence of an arrangement exists, delivery and disposal have
occurred or services have been rendered, the price is fixed or determinable and
collection is reasonably assured. We recognize revenue from three primary
sources: 1) waste disposal, 2) waste treatment and 3) waste transportation
services. Waste treatment and disposal revenue results primarily from fees
charged to customers for treatment and/or disposal of specified wastes.
Transportation revenue results from fees charged to customers for the cost of
delivering customer waste to one of our disposal facilities for treatment and/or
disposal. Treatment and disposal revenue is generally charged on a per-ton or
per-yard basis based on contracted prices and recognized when services are
completed and the waste is disposed of. Transportation revenue is generally
charged on a per-ton or per-yard basis based on contracted prices and recognized
when the transported wasted is received at our disposal sites. Burial
fees collected from customers for each ton or cubic yard of waste disposed in
our landfills is paid to the respective states and are not included in revenue.
Revenue and associated cost from waste that have been received but not yet
treated and disposed of in our landfills are deferred until disposal
occurs.
32
Our
Richland, Washington disposal facility is regulated by the WUTC, which approves
our rates for disposal of LLRW. Annual revenue levels are established based on a
rate agreement with the WUTC at amounts sufficient to cover the costs of
operation and provide us with a reasonable profit. Per-unit rates charged to
LLRW customers during the year are based on our evaluation of disposal volume
and radioactivity projections submitted to us by waste generators. Our proposed
rates are then reviewed and approved by the WUTC. If annual revenue exceeds the
approved levels set by the WUTC, we are required to refund excess collections to
facility users on a pro-rata basis. The rate agreement in effect for 2008 began
on January 1, 2008 and expires on January 1, 2014.
Disposal
Facility Accounting
In
general, a disposal cell development asset exists for the cost of building new
disposal space and a closure liability exists for closing, maintaining and
monitoring the disposal unit once this space is filled. Major assumptions and
judgments used to calculate cell development assets and closure liabilities are
as follows:
§
Personnel
and equipment costs incurred to construct new disposal cells are
identified and capitalized as a cell development
asset.
§
The
cell development asset is amortized as each available cubic yard of
disposal space is filled. Periodic independent engineering surveys and
inspection reports are used to determine the remaining volume available.
These reports take into account volume, compaction rates and space
reserved for capping filled disposal
cells.
§
Statement
of Financial Accounting Standards No. 143, Accounting for Asset
Retirement Obligations (“SFAS 143”), requires us to record the fair
value of an Asset Retirement Obligation (“ARO”) as a liability in the
period in which we incur a legal obligation associated with the retirement
of tangible long-lived assets. We are also required to record a
corresponding asset that is amortized over the life of the underlying
tangible asset. After the initial measurement, the ARO is adjusted at the
end of each period to reflect the passage of time and changes in the
estimated future cash flows underlying the
obligation.
The
closure liability (obligation) represents the present value of current cost
estimates to close, maintain and monitor disposal cells and support facilities.
Cost estimates are developed using input from our technical and accounting
personnel as well as independent engineers and our interpretation of current
requirements, and are intended to approximate fair value under the provisions of
SFAS 143. We estimate the timing of future payments based on expected
annual disposal airspace consumption and then accrete the current cost estimate
by an estimated inflation rate, estimated at December 31, 2008 to be 2.6%.
Inflated current costs are then discounted using our credit-adjusted risk-free
interest rate, which approximates our incremental borrowing rate in effect at
the time the obligation is established or when there are upward revisions to our
estimated closure and post-closure costs. Our weighted-average credit-adjusted
risk-free interest rate at December 31, 2008 approximated 8.1%. Final closure
and post-closure monitoring obligations are currently estimated as being paid
through 2103. During 2008, we updated several assumptions. This included the
estimated cost of closing active disposal cells at our Robstown, Texas facility
and the estimated year in which our Idaho and Texas sites will ultimately be
closed and post-closure care will begin. Additionally, we removed the closure
obligation associated with our Beatty, Nevada facility based on written
confirmation from the State of Nevada that cash contributed by the Company and
held in a dedicated state account maintained to satisfy closure and post-closure
obligations at our Beatty, Nevada facility can be used to fund interim closure
work. As a result, the closure obligation previously recorded for
closure activities at the Beatty, Nevada site was removed. These
changes resulted in a net decrease to our closure post-closure obligation of
$878,000, an increase of $45,000 in retirement assets and $923,000 recorded as a
reduction of other direct costs.
Changes
in inflation rates or the estimated costs, timing or extent of the required
future activities to close, maintain and monitor disposal cells and facilities
result in both: (i) a current adjustment to the recorded liability
and related asset and (ii) a change in the liability and asset amounts to be
recorded prospectively over the remaining life of the asset in accordance with
our depreciation policy. A hypothetical 1% increase in the inflation
rate would increase our closure/post-closure obligation by $1.7
million. A hypothetical 10% increase in our cost estimates would
increase our closure/post-closure obligation by $1.4 million.
Share
Based Payments
The
Company’s Board of Directors granted stock options to purchase our common stock
to certain employees and Directors under our previous 1992 Employee Stock Option
Plan and our 2008 Stock Option Incentive Plan. The Company has also granted
directors and certain employees restricted stock awards under the 2005 Director
Stock Plan and the 2006 Employee Stock Plan. Additionally, outstanding options
have been granted under a 1992 Director Plan option plan that was cancelled in
2005.The benefits provided under all of these plans are subject to the
provisions of revised SFAS No. 123 (SFAS 123 R), Share-Based Payment, which we
adopted effective January 1, 2006.
33
We
elected to use the modified prospective application in adopting SFAS 123 R and,
therefore, have not restated our results for prior periods. The valuation
provisions of SFAS 123 R apply to new awards and to awards that were outstanding
on the adoption date and subsequently modified or cancelled. Our results of
operations for 2008, 2007 and 2006 were impacted by the recognition of a
non-cash expense related to the fair value of our share-based compensation
awards. Share-based compensation expense recognized under SFAS 123 R for 2008,
2007 and 2006 were $820,000, $743,000 and $392,000, respectively.
The
determination of fair value of stock option awards on the date of grant using
the Black-Scholes model is affected by our stock price and subjective
assumptions. These assumptions include, but are not limited to, the expected
term of stock options and expected stock price volatility over the term of the
awards. Refer to Note 13 to the consolidated financial statements included in
this Form 10-K for a summary of the assumptions utilized in 2008, 2007 and
2006. Our stock options have characteristics significantly different
from those of traded options, and changes in the assumptions can materially
affect the fair value estimates.
SFAS 123
R requires forfeitures to be estimated at the time of grant and revised, if
necessary, in subsequent periods if actual forfeitures differ from those
estimates. When actual forfeitures vary from our estimates, we recognize the
difference in compensation expense in the period the actual forfeitures occur or
when options vest.
Income
Taxes
Income
taxes are accounted for using an asset and liability approach in accordance with
SFAS No. 109, Accounting for
Income Taxes, which requires the recognition of deferred tax assets and
liabilities for the expected future tax consequences of temporary differences
between the financial statement and tax basis of assets and liabilities at the
applicable tax rates. Deferred tax assets are required to be evaluated for the
likelihood of use in future periods. A valuation allowance is recorded against
deferred tax assets if, based on the weight of the available evidence, it is
more likely than not that some or all of the deferred tax assets will not be
realized. The determination of the need for a valuation allowance, if any,
requires management’s judgment and the use of estimates. During 2007, we
utilized the remaining federal net operating loss carry forwards that were
available as of December 31, 2006, and began paying our tax obligations from
operating cash flows. As of December 31, 2008, we have deferred tax
assets totaling approximately $819,000, net of a valuation allowance of $2.3
million and deferred tax liabilities totaling approximately $4.1
million.
On
January 1, 2007 we adopted Financial Accounting Standards Board (“FASB”)
Interpretation No. 48, Accounting for Uncertainty in Income
Taxes-an Interpretation of FASB Statement No. 109 (“FIN 48”) to account
for uncertain tax positions. As discussed in Note 2 and Note 11 to the
accompanying consolidated financial statements, the adoption of FIN 48 had no
impact on our financial position, results of operations or cash flows. The
application of income tax law is inherently complex. Tax laws and regulations
are voluminous and at times ambiguous and interpretations of guidance regarding
such tax laws and regulations change over time. This requires us to make many
subjective assumptions and judgments regarding our income tax exposures. Changes
in our assumptions and judgments can materially affect our financial position,
results of operations and cash flows.
Litigation
We have
in the past been involved in litigation requiring estimates of timing and loss
potential whose timing and ultimate disposition is controlled by the judicial
process. As of December 31, 2008, we did not have any ongoing, pending or
threatened legal action that management believes would have a material 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.
Off
Balance Sheet Arrangements
We do not
have any off balance sheet arrangements or interests in variable interest
entities that would require consolidation. AEC operates through wholly-owned
subsidiaries.
Item
7A. Quantitative and Qualitative Disclosures About Market
Risk
We do not
maintain equities, commodities, derivatives, or any other similar instruments
for trading or any other purposes.
We have
minimal interest rate risk on investments or other assets due to our
preservation of capital approach to investments. At December 31, 2008,
approximately $18.5 million was held in cash and cash equivalents primarily
invested in money market accounts. Interest earned on these
investments is approximately 2% per year. We have no debt obligations
subject to interest rate risk except for our available credit facility, under
which we can elect to borrow monies utilizing LIBOR plus an applicable spread or
the prime rate. At December 31, 2008 and 2007, there were no
outstanding borrowings on the credit facility.
34
Item
8. Financial Statements and Supplementary Data
Page
Number
Report
of Independent Registered Public Accounting Firm
Consolidated
Statements of Stockholders’ Equity for the years ended December 31, 2008,
2007 and 2006
40
Notes
to Consolidated Financial Statements
41
35
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Stockholders and Board of Directors of
American
Ecology Corporation
We have
audited the accompanying consolidated balance sheets of American Ecology
Corporation and subsidiaries (“the Company”) as of December 31, 2008 and 2007
and the related consolidated statements of operations, stockholders' equity and
cash flows for each of the years in the three-year period ended December 31,2008. We also have audited American Ecology Corporation and subsidiaries’
internal control over financial reporting as of December 31, 2008, based on
criteria established in Internal Control — Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). The
Company’s management is responsible for these statements, for maintaining
effective control over financial reporting, and for its assessment of the
effectiveness of internal control over financial reporting, included in the
accompanying Management’s Annual Report on Internal Control over Financial
Reporting located in Item 9A. Our responsibility is to express an opinion on
these financial statements and an opinion on the Company’s internal control over
financial reporting based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement and whether effective
internal control over financial reporting was maintained in all material
respects. Our audits of the financial statements included examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
Our audit of internal control over financial reporting included obtaining an
understanding of internal control over financial reporting, assessing the risk
that a material weakness exists, and testing and evaluating the design and
operating effectiveness of internal control based on the assessed risk. Our
audits also included performing such other procedures as we considered necessary
in the circumstances. We believe that our audits provide a reasonable basis for
our opinions.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with the authorizations of management and
directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition
of the company’s assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies and procedures may deteriorate.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of American Ecology
Corporation and subsidiaries as of December 31, 2008 and 2007, and the
consolidated results of its operations and its cash flows for each of the years
in the three-year period ending December 31, 2008, in conformity with accounting
principles generally accepted in the United States of America. Also in our
opinion, American Ecology Corporation and subsidiaries’ maintained, in all
material respects, effective internal control over financial reporting as of
December 31, 2008, based on criteria established in Internal Control —
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission.
Adjustments
to reconcile net income to net cash provided by
operating
activities:
Depreciation,
amortization and accretion
10,641
10,009
8,093
Deferred
income taxes
3,333
2,924
6,721
Stock-based
compensation expense
820
743
392
Net
(gain) loss on sale of property and equipment
34
(26
)
(167
)
Accretion
of interest income
(15
)
(158
)
(333
)
Changes
in assets and liabilities:
Receivables
(1,315
)
(1,730
)
(13,962
)
Income
tax receivable
(1,840
)
(344
)
598
Other
assets
753
(395
)
1,207
Accounts
payable and accrued liabilities
(1,815
)
(659
)
1,581
Deferred
revenue
166
879
2,351
Accrued
salaries and benefits
282
670
(606
)
Closure
and post-closure obligations
(1,934
)
(659
)
(1,051
)
Net
cash provided by operating activities
30,608
30,650
20,713
Cash
Flows From Investing Activities:
Purchases
of property and equipment
(13,617
)
(15,430
)
(19,758
)
Purchases
of short-term investments
(992
)
(24,901
)
(32,482
)
Maturities
of short-term investments
3,216
28,970
42,909
Restricted
cash
165
(190
)
(4,607
)
Proceeds
from sale of property and equipment
14
92
175
Net
cash used in investing activities
(11,214
)
(11,459
)
(13,763
)
Cash
Flows From Financing Activities:
Dividends
paid
(12,054
)
(10,937
)
(10,817
)
Common
stock repurchases
(2,588
)
-
-
Payment
of capital lease obligations
(10
)
(7
)
(4
)
Proceeds
from stock option exercises
1,095
328
2,003
Tax
benefit of common stock options
73
213
2,002
Net
cash used in financing activities
(13,484
)
(10,403
)
(6,816
)
Increase
in cash and cash equivalents
5,910
8,788
134
Cash
and cash equivalents at beginning of period
12,563
3,775
3,641
Cash
and cash equivalents at end of period
$
18,473
$
12,563
$
3,775
Supplemental
Disclosures
Income
taxes paid
$
12,169
$
9,545
$
632
Interest
paid
7
3
8
Non-cash
investing and financing activities:
Closure/Post
closure retirement asset
45
1,913
1,106
Capital
expenditures in accounts payable
896
411
691
Acquisition
of equipment with capital leases
6
12
34
The
accompanying notes are an integral part of these financial
statements.
39
AMERICAN
ECOLOGY CORPORATION
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
$s
in thousands
Common
Shares Issued
Par
Value Common Stock
Additional
Paid-In Capital
Retained
Earnings
Treasury
Stock
Total
Equity
Balance
12-31-2005
17,742,420
$
177
$
53,140
$
10,569
-
$
63,886
Net
income
-
-
-
15,889
-
15,889
Dividend
paid
-
-
-
(10,817
)
-
(10,817
)
Stock
option exercises
421,420
5
1,998
-
-
2,003
Tax
benefit of equity based awards
-
-
2,002
-
-
2,002
Stock-based
compensation
-
-
392
-
-
392
Issuance
of restricted common stock
10,200
-
-
-
-
-
Balance
12-31-2006
18,174,040
182
57,532
15,641
-
73,355
Net
income
-
-
-
19,396
-
19,396
Dividend
paid
-
-
-
(10,937
)
-
(10,937
)
Stock
option exercises
51,000
-
328
-
-
328
Tax
benefit of equity based awards
-
-
213
-
-
213
Stock-based
compensation
-
-
743
-
-
743
Issuance
of restricted common stock
21,000
-
-
-
-
-
Balance
12-31-2007
18,246,040
182
58,816
24,100
-
83,098
Net
income
-
-
-
21,498
-
21,498
Dividend
paid
-
-
-
(12,054
)
-
(12,054
)
Stock
option exercises
53,774
1
1,094
-
-
1,095
Tax
benefit of equity based awards
-
-
73
-
-
73
Stock-based
compensation
-
-
820
-
-
820
Issuance
of restricted common stock
4,500
-
-
-
-
-
Repurchase
of common stock: 155,175 shares
-
-
-
-
(2,588
)
(2,588
)
Balance
12-31-2008
18,304,314
$
183
$
60,803
$
33,544
$
(2,588
)
$
91,942
The
accompanying notes are an integral part of these financial
statements.
40
AMERICAN
ECOLOGY CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1. DESCRIPTION
OF BUSINESS
American
Ecology Corporation, through its subsidiaries provides radioactive, PCB,
hazardous and industrial waste management services to commercial and government
entities, such as refineries and chemical production facilities, electric
utilities, manufacturers, steel mills and medical and academic institutions. We
are headquartered in Boise, Idaho. Throughout these financial statements words
such as “we,”“us,”“our,”“AEC” and the “Company” refer to American Ecology
Corporation and its subsidiaries.
Our
principal operating subsidiaries are US Ecology Nevada, Inc., a Delaware
corporation; US Ecology Texas, Inc., a Delaware corporation; US Ecology
Washington, Inc., a Delaware corporation; and US Ecology Idaho, Inc., a Delaware
corporation.
We
operate within two segments: Operating Disposal Facilities and Non-Operating
Disposal Facilities. The Operating Disposal Facilities are currently accepting
hazardous, PCB, industrial and low-level radioactive waste (“LLRW”), naturally
occurring and accelerator produced radioactive materials (“NORM/NARM”) and
low-activity radioactive material (“LARM”). The Operating Disposal Facilities
segment includes our RCRA permitted waste treatment and disposal facilities in
Beatty, Nevada; Grand View, Idaho; and Robstown, Texas, and our AEA permitted
disposal facility in Richland, Washington.
The
Non-Operating Disposal Facilities segment includes our closed hazardous waste
disposal, processing, and deep-well injection facilities located in Sheffield,
Illinois; Bruneau, Idaho; and Winona, Texas. We currently incur costs for
remediation and long-term monitoring and maintenance obligations at our closed
facilities.
NOTE
2. SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation.
The accompanying financial statements are prepared on a consolidated basis. All
significant inter-company balances and transactions have been eliminated in
consolidation. Our year-end is December 31.
Cash and Cash Equivalents.
Cash and cash equivalents consist primarily of cash on deposit, money market
accounts and short-term investments with original maturities of 30 days or
less.
Short-Term Investments.
Short-term investments consist of investments in government agency securities or
investments in high-quality commercial paper. Investments are classified as
available for sale and held at amortized cost, which approximates fair value.
The investments have a maximum maturity of three months. Our investment policy
allows for maturities up to two years and a wide range of investment rated
debt.
Financial Instruments. Cash
and cash equivalents, short-term investments, accounts receivable, short-term
borrowings, restricted cash, accounts payable and accrued liabilities as
presented in the consolidated financial statements approximate fair value
because of the short-term nature of these instruments.
Receivables. Receivables are
stated at an amount management expects to collect. Based on management’s
assessment of the credit history of the customers having outstanding balances
and factoring in current economic conditions, management has concluded that
potential unreserved future losses on balances outstanding at year-end will not
be material.
Restricted
Cash. Restricted cash balances of $4.7 million and
$4.9 million at December 31, 2008 and 2007, respectively, represent
funds held in third party managed trust accounts as collateral for our financial
assurance policies for closure and post-closure obligations. These
restricted cash balances are maintained by third-party trustees and are invested
in money market accounts. The balances are adjusted to fair market
value on a monthly basis.
41
Revenue Recognition. We recognize revenue when
persuasive evidence of an arrangement exists, delivery and disposal have
occurred or services have been rendered, the price is fixed or determinable, and
collection is reasonably assured. We recognize revenue from three primary
sources: 1) waste disposal, 2) waste treatment and 3) waste transportation
services. Waste treatment and disposal revenue results primarily from
fees charged to customers for treatment and/or disposal of specified wastes.
Transportation revenue results from fees charged to customers for the cost of
delivering waste in possession of a customer to one of our disposal facilities
for treatment and/or disposal. Treatment and disposal revenue is generally
charged on a per-ton or per-yard basis based on contracted prices and recognized
when services are completed and the waste is disposed of. Transportation revenue
is generally charged on a per-ton or per-yard basis based on contracted prices
and recognized when the transported wasted is received at our disposal sites.
Burial fees collected from customers for each ton or cubic yard of waste
disposed in our landfills is paid to the respective states and are not included
in revenue. Revenue and associated cost from waste that has been received but
not yet treated and disposed of in our landfills are deferred until disposal
occurs.
Our
Richland, Washington disposal facility is regulated by the Washington Utilities
and Transportation Commission (“WUTC”), which approves rates for disposal of
LLRW. Annual revenue levels are established based on an agreement with the WUTC
at amounts sufficient to cover the costs of operation and provide us with a
reasonable profit. Per-unit rates charged to LLRW customers during the year are
based on disposal volumes and radioactivity projections submitted by us and
approved by the WUTC. If annual revenue exceeds the approved levels set by the
WUTC, we are required to refund the excess collections to facility users on a
pro-rata basis.
Unbilled Receivables.
Unbilled receivables are recorded for work performed under contracts that have
not yet been invoiced to customers and arise due to the timing of billings.
Substantially all unbilled receivables at December 31, 2008 were billed in the
following month.
Deferred revenue. Revenue
from waste that has been received but not yet treated and disposed of in our
landfill or advance billings prior to treatment and disposal services are
deferred until such services are completed.
Property and Equipment.
Property and equipment are recorded at cost and depreciated on the straight-line
method over estimated useful lives. Replacements and major repairs of property
and equipment are capitalized and retirements are made when assets are disposed
of or when the useful life has been exhausted. Minor components and parts are
expensed as incurred. During 2008, 2007 and 2006, maintenance and repair
expenses charged to continuing operations were $2.1 million, $1.9 million and
$1.7 million, respectively.
We assume
no salvage value for our depreciable fixed assets. The estimated useful lives
for significant property and equipment categories are as follows (in
years):
Useful
Lives
Vehicles
and other equipment
3
to 10
Disposal
facility and equipment
3
to 20
Buildings
and improvements
5
to 40
Railcars
40
Disposal Cell Accounting.
Qualified disposal cell development costs such as personnel and equipment costs
incurred to construct new disposal cells are recorded and capitalized at cost.
Capitalized cell development costs, net of recorded amortization, are added to
estimated future costs of the permitted disposal cell to be incurred over the
remaining construction of the cell, to determine the amount to be amortized over
the remaining estimated cell life. Estimates of future costs are developed using
input from independent engineers and internal technical and accounting managers.
We review these estimates at least annually. Amortization is recorded on a unit
of consumption basis, typically applying cost as a rate per cubic yard disposed.
Disposal facility costs are expected to be fully amortized upon final closure of
the facility, as no salvage value applies. Costs associated with ongoing
disposal operations are charged to expense as incurred.
42
We have
material financial commitments for closure and post-closure obligations for
certain facilities we own or operate. We estimate future cost requirements for
closure and post-closure monitoring based on Resource Conservation and Recovery
Act (“RCRA”), and conforming state requirements and facility permits. RCRA
requires that companies provide the responsible regulatory agency acceptable
financial assurance for closure and post-closure monitoring of each facility for
30 years following closure. Estimates for final closure and post-closure costs
are developed using input from our technical and accounting managers as well as
independent engineers and are reviewed by management at least annually. These
estimates involve projections of costs that will be incurred after the disposal
facility ceases operations, through the required post-closure care period. The
Financial Accounting Standards Board (“FASB”) issued Statement of Financial
Accounting Standard (“SFAS”) No. 143, Accounting for Asset Retirement
Obligations (“SFAS 143”), which established standards for accounting for
an obligation associated with the retirement of a long-lived tangible asset. We
apply these standards in accounting for our asset retirement obligations. In
accordance with SFAS 143, the present value of the estimated closure and
post-closure costs are accreted using the interest method of allocation to other
direct costs in our consolidated statement of operations so that 100% of the
future cost has been incurred at the time of payment.
We have
historically been successful in receiving timely approvals for proposed disposal
facility expansions; however, there can be no assurance that we will be
successful in obtaining future expansion approvals. Our operations and
accounting managers review the estimates and assumptions used in developing this
information at least annually, and we believe such estimates are reasonable. If
such estimates prove to be incorrect, the costs incurred in the pursuit of a
denied expansion permit would be charged against earnings. Additionally, the
disposal facility’s future operations would reflect lower profitability due to
expenses relating to the decrease in life, or impairment of the
facility.
Impairment of Long-lived
assets. Long-lived assets consist primarily of property and equipment and
facility development costs. The recoverability of long-lived assets is evaluated
periodically through analysis of operating results and consideration of other
significant events or changes in the business environment. If an operating unit
had indications of possible impairment, such as current operating losses, we
would evaluate whether impairment exists on the basis of undiscounted expected
future cash flows from operations over the remaining amortization period. If an
impairment loss were to exist, the carrying amount of the related long-lived
assets would be reduced to their estimated fair value based upon discounted cash
flows from operations.
Income taxes. Income taxes
are accounted for using an asset and liability approach. This requires the
recognition of deferred tax assets and liabilities for the expected future tax
consequences of temporary differences between the financial statement and tax
basis of assets and liabilities at the applicable tax rates. A valuation
allowance is recorded against deferred tax assets if, based on the weight of the
available evidence, it is more likely than not that some or all of the deferred
tax assets will not be realized.
The
determination of our provision for income taxes requires significant judgment,
the use of estimates, and the interpretation and application of complex tax
laws. Significant judgment is required in assessing the timing and amounts of
deductible and taxable items and the probability of sustaining uncertain tax
positions. The impact of uncertain tax positions would be recorded in our
financial statements only after determining a more-likely-than-not probability
that the uncertain tax positions would withstand challenge, if any, from taxing
authorities. As facts and circumstances change, we reassess these probabilities
and would record any changes in the financial statements as appropriate. On
January 1, 2007, we adopted the provisions of FASB Interpretation
(“FASB”) No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”),
which sets out the framework by which such judgments are to be
made.
Insurance. We are
self-insured for health-care coverage of employees. Stop-loss insurance is
carried, under which we assume liability for claims in excess of $150,000 per
individual or on an aggregate basis for the monthly population. Accrued costs
for our self-insured health care coverage were $234,000 and $184,000 at December31, 2008 and 2007, respectively. We also maintain a Pollution and Remediation
Legal Liability Policy pursuant to RCRA subject to a $250,000 self-insured
retention. We are also insured for consultant environmental liability subject to
a $100,000 self-insured retention. Additionally, we are insured for
losses or damage to third party property or people subject to a $50,000
self-insured retention.
Earnings per share. Basic
earnings per share is calculated based on the weighted-average number of
outstanding common shares during the applicable period. Diluted earnings per
share is based on the weighted-average number of outstanding common shares plus
the weighted-average number of potential outstanding common shares. Potential
common shares that would increase earnings per share or decrease loss per share
are anti-dilutive and are excluded from earnings per share computations.
Earnings per share is computed separately for each period
presented.
Treasury Stock. Shares of
common stock repurchased by us are recorded at cost as treasury stock and result
in a reduction of stockholders’ equity in our Consolidated Balance Sheets.
Treasury shares are reissued using the weighted average cost method for
determining the cost of the shares reissued. The difference between
the cost of the shares reissued and the issuance price is added or deducted from
additional paid-in capital.
43
New and Recently Issued
Accounting Pronouncements.
SFAS 157. In September 2006,
the Financial Accounting Standards Board (“FASB”) issued Statement of Financial
Accounting Standard (“SFAS”) 157, Fair Value Measurements
(“SFAS 157”), which defines fair value, establishes a framework for measuring
fair value under generally accepted accounting principles and expands
disclosures about fair value measurements. SFAS 157 applies to other existing
accounting pronouncements that require or permit fair value measurements, the
FASB having previously concluded in those accounting pronouncements that fair
value is the relevant measurement attribute. While SFAS 157 does not require any
new fair value measurements, its application may change the current practice for
fair value measurements. SFAS 157 is effective for financial statements issued
for fiscal years beginning after November 15, 2007, and interim periods within
those fiscal years. In February 2008, the FASB issued FSP FAS 157-2, Effective Date of FASB Statement No.
157, which delays the effective date of SFAS 157 for nonfinancial
assets and liabilities to fiscal years beginning after November 15, 2008. The
adoption of SFAS 157 for financial assets and liabilities in the first quarter
of 2008 had no significant impact on our consolidated financial
statements. We are currently evaluating the impact of SFAS 157 for
non-financial assets and liabilities.
SFAS 159. In February 2007,
the FASB issued SFAS 159, The
Fair Value Option for Financial Assets and Financial Liabilities (“SFAS
159”), which permits entities to measure many financial instruments and certain
other items at fair value that are not currently required to be measured at fair
value. SFAS 159 is effective for fiscal years beginning after November 15,2007 and was adopted by the Company beginning in the first quarter of fiscal
2008. The adoption of SFAS 159 had no impact on our consolidated financial
statements.
SFAS 141 R. In
December 2007, the FASB issued SFAS 141(revised 2007), Business Combinations (“SFAS
141 R”), which establishes principles and requirements for how an acquirer
recognizes and measures the identifiable assets acquired, the liabilities
assumed and any non-controlling interest in the acquiree in a business
combination. SFAS 141 R requires that assets and liabilities, including
contingencies, be recorded at the fair value determined on the acquisition date
with changes thereafter reflected in results of operations, as opposed to
goodwill. Additionally, SFAS 141 R modifies the treatment of restructuring costs
associated with a business combination and requires acquisition costs to be
expensed as incurred. The statement also provides guidance on disclosures
related to the nature and financial impact of the business combination. SFAS 141
R is effective for transactions closing after December 15, 2008 and for fiscal
years beginning after December 15, 2008. SFAS 141 R will be adopted for
business combinations entered into by the Company after December 31, 2008. The
impact of this new standard will be dependent on the nature of acquisitions
completed after adoption of SFAS 141 R. Any impact will be evaluated as part of
the economic evaluation of the business combination.
SFAS 160. In
December 2007, the FASB issued SFAS 160, Non-controlling Interests in
Consolidated Financial Statements—an amendment of ARB No. 51 (“SFAS
160”). This statement establishes accounting and reporting standards for the
non-controlling interest in a subsidiary and for the deconsolidation of a
subsidiary. This statement is effective prospectively, except for certain
retrospective disclosure requirements, for fiscal years beginning after
December 15, 2008. This statement will be effective for the Company
beginning in the first quarter of 2009. Although the Company will continue to
evaluate the application of SFAS 160, we do not currently believe adoption of
SFAS 160 will have a material impact on our consolidated financial
statements.
SFAS 161. In March
2008, the FASB issued SFAS 161, Disclosures About Derivative
Instruments and Hedging Activities – an amendment of FASB Statement No.
133 (“SFAS 161”). SFAS 161 expands quarterly disclosure
requirements in SFAS 133 about an entity’s derivative instruments and hedging
activities. SFAS 161 is effective for fiscal years beginning after
November 15, 2008. This statement will be effective for the Company
beginning in the first quarter of 2009. Although the Company will
continue to evaluate the application of SFAS 161, we currently do not have any
derivative instruments or hedging activities and therefore believe the adoption
will not have a material impact on our consolidated financial
statements.
SFAS 162. In May
2008, the FASB issued SFAS 162, The Hierarchy of Generally Accepted
Accounting Principles (“SFAS 162”). SFAS 162 identifies the
sources of accounting principles and the framework for selecting the principles
to be used in the preparation of financial statements of non-governmental
entities that are presented in conformity with generally accepted accounting
principles in the United States. This statement is effective 60 days
following the SEC’s approval of the Public Company Accounting Oversight Board
amendments to AU Section 411, The Meaning of Present Fairly in
Conformity with Generally Accepted Accounting
Principles. Although the Company will continue to evaluate the
application of SFAS 162, we do not currently believe the adoption of SFAS 162
will have a material impact on our consolidated financial
statements.
44
FSP EITF
03-6-1. In June 2008, the FASB issued FSP EITF 03-6-1, Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating Securities
(“FSP EITF 03-6-1”). FSP EITF 03-6-1 addresses whether instruments
granted in share-based payment transactions are participating securities prior
to vesting and, therefore, need to be included in computing earnings per share
under the two-class method described in SFAS No. 128, “Earnings Per Share.”
FSP EITF 03-6-1 requires companies to treat unvested share-based payment awards
that have non-forfeitable rights to dividend or dividend equivalents as a
separate class of securities in calculating earnings per share. FSP EITF 03-6-1
will be effective for the Company’s fiscal year beginning January 1, 2009,
with early adoption prohibited. Although the Company will continue to
evaluate the application of FSP EITF 03-6-1, we do not currently believe the
adoption of FSP EITF 03-6-1 will have a material impact on our consolidated
financial statements.
FSP 157-3. In
October 2008, the FASB issued FSP 157-3, Determining Fair Value of a
Financial Asset in a Market That Is Not Active (“FSP 157-3”). FSP 157-3
clarified the application of SFAS 157 in an inactive market. It demonstrated how
the fair value of a financial asset is determined when the market for that
financial asset is inactive. FSP 157-3 was effective upon issuance, including
prior periods for which financial statements had not been issued. The
implementation of this standard did not have a material impact on our
consolidated financial position or results of operations.
NOTE
3. USE
OF ESTIMATES AND RECLASSIFICATIONS
Use of
Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the financial
statements, as well as the reported amounts of revenue and expenses during the
reporting period. Listed below are the estimates and assumptions that management
considers to be significant in the preparation of its financial
statements.
·
Allowance for Doubtful
Accounts – We estimate losses for uncollectible accounts based on
the aging of the accounts receivable and an evaluation of the likelihood
of success in collecting the
receivable.
·
Recovery of Long-Lived
Assets – We evaluate the recovery of our long-lived assets
periodically by analyzing its operating results and considering
significant events or changes in the business
environment.
·
Income Taxes – We
assume the deductibility of certain costs in our income tax filings,
estimate our state income tax rate and estimate the future recovery of
deferred tax assets.
·
Legal Accruals – We
estimate the amount of potential exposure we may have with respect to
litigation, claims and assessments.
·
Disposal Cell Development and
Final Closure/Post-Closure Amortization – We expense amounts for
disposal cell usage and final closure and post-closure costs for each
cubic yard of waste disposed of at our operating facilities. In
determining the amount to expense for each cubic yard of waste disposed,
we estimate the cost to develop each disposal cell and the final closure
and post-closure costs for each disposal cell and facility. The expense
for each cubic yard is then calculated based on the remaining permitted
capacity and total permitted capacity. Estimates for final closure and
post-closure costs are developed using input from third party engineering
consultants, and our internal technical and accounting personnel.
Management reviews estimates at least annually. Estimates for final
disposal cell closure and post-closure consider when the costs would
actually be paid and, where appropriate, inflation and discount
rates.
Actual
results could differ materially from the estimates and assumptions that we use
in the preparation of our financial statements. As it relates to estimates and
assumptions in amortization rates and environmental obligations, significant
engineering, operations and accounting judgments are required. We review these
estimates and assumptions no less than annually. In many circumstances, the
ultimate outcome of these estimates and assumptions will not be known for
decades into the future. Actual results could differ materially from these
estimates and assumptions due to changes in applicable regulations, changes in
future operational plans and inherent imprecision associated with estimating
environmental impacts far into the future.
Reclassifications
The
Company reclassified $2.6 million from Trade receivables to Unbilled revenue
receivables on the consolidated balance sheet at December 31, 2007. The amounts
reclassified represent valid receivables under executed customer contracts that
were not invoiced to the customer as of the balance sheet date. We
believe these receivables are better presented as Unbilled revenue receivables
as of the balance sheet date. This reclassification had no impact on net
receivables, current assets, total assets, results of operations or cash flows
and we believe this reclassification is not material to the consolidated
financial statements taken as a whole.
45
NOTE
4. CONCENTRATIONS
AND CREDIT RISK
Major Customers. The
following customers accounted for more than 10% of revenue for the years ending
December 31:
Percent
of Revenue
Customer
2008
2007
2006
Honeywell
International, Inc.
43%
41%
38%
U.S.
Army Corps of Engineers
6%
7%
10%
Trade
receivables from Honeywell International, Inc. represented 43% and 50% of our
total trade receivables as of December 31, 2008 and 2007,
respectively. No other customer’s trade receivables represented more
than 10%.
Credit Risk Concentration. We
maintain most of our cash and short-term investments with Wells Fargo Bank.
Substantially all balances are uninsured and are not used as collateral for
other obligations. Short-term investments in 2007 consisted of high-quality
commercial paper with a maximum maturity of three
months. 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, except for receivables from
Honeywell for which significant credit risk exists. Credit risk on
Honeywell receivables is partially mitigated by federal court orders requiring
that Honeywell perform activities covered by our contract. Typically, we have
not required customers to provide collateral for such obligations.
Labor Concentrations. As of
December 31, 2008, the Paper, Allied-Industrial Chemical & Energy Workers
International Union, AFL-CIO, CLC (PACE), represents 10 employees at our
Richland facility. Our 243 other employees do not belong to a
union.
NOTE
5. SHORT-TERM
INVESTMENTS
There
were no short-term investments outstanding at December 31, 2008. Short-term
investments at December 31, 2007 comprised of $2.2 million in fixed maturity
commercial paper.
The
allowance for doubtful accounts is a provision for uncollectible accounts
receivable and unbilled receivables. The allowance is evaluated on a monthly
basis and adjusted to reflect our collection history and an analysis of the
accounts receivables aging. The allowance is decreased by accounts receivable as
they are written off. The allowance is adjusted periodically to reflect actual
experience:
Depreciation
and amortization expense was $9.4 million, $8.9 million and $7.0 million for the
years ended December 31, 2008, 2007 and 2006, respectively.
NOTE
8. EMPLOYEE
BENEFIT PLANS
We
maintain the American Ecology Corporation 401(k) Savings Plan (“the Plan”) for
employees who voluntarily contribute a portion of their compensation, thereby
deferring income for federal income tax purposes. The Plan covers substantially
all of our employees. Participants may contribute a percentage of salary up to
the IRS limitations. We contribute a matching contribution equal to 55% of
participant contributions up to 6% of compensation. We contributed in 2008, 2007
and 2006 matching contributions to the Plan of $311,000, $267,000 and $241,000,
respectively.
NOTE
9. CLOSURE
AND POST-CLOSURE OBLIGATIONS
Accrued
closure and post-closure liability represents the expected future costs,
including corrective actions, associated with closure and post-closure of our
operating and non-operating disposal facilities. Liabilities are recorded when
work is probable, and the costs can be reasonably estimated, consistent with
SFAS No. 5 “Accounting for
Contingencies” (“SFAS 5”). 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.
We do not
presently bear significant financial responsibility for closure and post-closure
care of the disposal facilities located on state-owned land at our Beatty,
Nevada site or state-leased federal land at the Richland, Washington site. The
States of Nevada and Washington collect fees from us based on the waste received
on a quarterly basis. Such fees are deposited in dedicated, state-controlled
funds to cover the future costs of closure and post-closure care and
maintenance. Such fees are periodically reviewed by the states.
We apply
SFAS 143 to account for our asset retirement obligations. SFAS 143 requires a
liability to be recognized as part of the fair value of future asset retirement
obligations and an associated asset to be recognized as part of the carrying
amount of the underlying asset. This obligation is valued based on our best
estimates of current costs and current estimated closure cost taking into
account current technology, material and service costs, laws and regulations.
These cost estimates are increased by an estimated inflation rate, estimated to
be 2.6% at December 31, 2008. Inflated current costs are then
discounted using our credit-adjusted risk-free interest rate, which approximates
our incremental borrowing rate, in effect at the time the obligation is
established or when there are upward revisions to our estimated closure and
post-closure costs. Our weighted-average credit-adjusted risk-free interest rate
at December 31, 2008 approximated 8.1%. We perform periodic reviews of both
non-operating and operating sites and revise the accruals as
necessary.
47
Changes
to reported closure and post-closure obligations for the years ended December31, 2008 and 2007 were as follows:
$s
in thousands
2008
2007
Beginning
obligation
$
15,134
$
12,816
Accretion
expense
1,217
1,064
Payments
(1,011
)
(733
)
Adjustments
(878
)
1,987
Ending
obligation
14,462
15,134
Less
current portion
(490
)
(803
)
Long-term
portion
$
13,972
$
14,331
The
adjustment to the obligation is a change in the expected timing or amount of
cash expenditures based upon actual and estimated cash expenditures. The primary
adjustments in 2008 were: (1) an $857,000 decrease as a result of
removing the closure obligation associated with our Beatty, Nevada facility
based on written confirmation from the State of Nevada that cash contributed by
the Company and held in a dedicated state account maintained to satisfy closure
and post-closure obligations at our Beatty, Nevada hazardous waste disposal
facility can be used to fund interim closure work, (2) a net $21,000 decrease to
the obligation as a result of changes in our estimated costs for closure and
post-closure activities at our operating and non-operating
facilities.
The
primary adjustments in 2007 were: (1) a $1.3 million increase to the obligation
as a result of increasing our estimated costs to close active disposal cells,
(2) a $514,000 increase to the obligation as a result of construction of new
disposal cell space and (3) a $207,000 increase to the obligation as the result
of accelerating our facilities closure timeline due to increased disposal
volumes.
The
reported closure and post-closure asset is recorded as a component of Property
and equipment, net, in the consolidated balance sheet for the years ended
December 31, 2008 and 2007 as follows:
$s
in thousands
2008
2007
Net
closure and post-closure asset, beginning of year
$
3,298
$
2,368
Additions
or adjustments to closure and post-closure asset
30
1,913
Amortization
of closure post-closure asset
(1,100
)
(983
)
Net
closure and post-closure asset, end of year
$
2,228
$
3,298
NOTE
10. DEBT
Revolving
Line of Credit
On June30, 2008, we entered into a new $15.0 million unsecured revolving line of credit
(the “Revolving Credit Agreement”) with Wells Fargo Bank, National Association
(“Wells Fargo”). This Revolving Credit Agreement expires on June 15,2010. Monthly interest only payments are paid based on a pricing grid
under which the interest rate decreases or increases based on our ratio of
funded debt to earnings before interest, taxes, depreciation and amortization.
We can elect to borrow utilizing the offshore London Inter-Bank Offering Rate
(“LIBOR”) plus an applicable spread or the prime rate. At December 31, 2008, the
applicable interest rate on the line of credit was 1.04%. The credit agreement
contains certain quarterly financial covenants, including a maximum leverage
ratio, a maximum funded debt ratio and a minimum required tangible net worth.
Pursuant to our credit agreement, we may only declare quarterly or annual
dividends if on the date of declaration, no event of default has occurred, or no
other event or condition has occurred that would constitute an event of default
after giving effect to the payment of the dividend. At December 31, 2008, we
were in compliance with all of the financial covenants in the credit
agreement.
At
December 31, 2008 and 2007, we had no amounts outstanding on the revolving line
of credit. At December 31, 2008 the availability under the line of credit was
$11.0 million with $4.0 million of the line of credit issued in the form of a
standby letter of credit utilized as collateral for closure and post-closure
financial assurance. At December 31, 2007, the availability under the line of
credit was $11.0 million with $4.0 million of the line of credit issued in the
form of a standby letter of credit utilized as collateral for closure and
post-closure financial assurance.
48
NOTE
11. INCOME
TAXES
The
components of the income tax expense were as follows:
$s
in thousands
2008
2007
2006
Current:
U.S.
Federal
$
8,992
$
8,310
$
345
State
1,411
1,088
885
10,403
9,398
1,230
Deferred:
U.S.
Federal
3,042
2,864
8,444
State
290
60
305
3,332
2,924
8,749
$
13,735
$
12,322
$
9,979
The
following table reconciles between the effective income tax rate and the
applicable statutory federal and state income tax rate:
2008
2007
2006
Taxes
computed at statutory rate
35.0
%
35.0
%
34.0
%
State
income taxes (net of federal) income tax benefit
3.4
2.0
3.0
Other
0.6
1.8
1.6
39.0
%
38.8
%
38.6
%
The tax
effects of temporary differences between income for financial reporting and
taxes that gave rise to significant portions of the deferred tax assets and
liabilities as of December 31, 2008 and 2007 were as follows:
$s
in thousands
2008
2007
Current
deferred tax assets:
Environmental
compliance and other site related costs
$
188
$
308
Accruals,
allowances and other
496
359
Total
current deferred tax assets
$
684
$
667
Long-term
deferred tax assets (liabilities):
Net
operating loss carry forward
$
2,313
$
2,316
Environmental
compliance and other site related costs
(550
)
1,762
Accruals,
allowances and other
90
71
Property
and equipment
(3,512
)
(2,458
)
Total
long-term deferred tax assets
(1,659
)
1,691
Less:
valuation allowance
(2,268
)
(2,268
)
Net
long-term deferred tax (liabilities) assets
$
(3,927
)
$
(577
)
We have
historically recorded a valuation allowance for certain deferred tax assets due
to uncertainties regarding future operating results and limitations on
utilization of net operating loss carry forwards (“NOLs”) for tax purposes. The
realization of a significant portion of net deferred tax assets is based in part
on our estimates of the timing of reversals of certain temporary differences and
on the generation of taxable income before such reversals. At December 31, 2008
and 2007, we continued to maintain a valuation allowance for approximately $2.3
million of state tax benefits that are not expected to be utilizable prior to
expiration. During the first quarter of 2007, we utilized the remaining $2.5
million of federal net operating loss carry forwards that were available at
December 31, 2006 and began paying our tax obligations from operating cash flows
during the second quarter of 2007.
On
January 1, 2007, we adopted the provisions of FIN 48. FIN 48 clarifies the
accounting for income taxes by prescribing a minimum recognition threshold a tax
position is required to meet before being recognized in the financial
statements. FIN 48 also provides guidance on derecognition, measurement,
classification, interest and penalties, accounting in interim periods,
disclosure and transition. This adoption did not have an impact on our
consolidated financial statements. As of December 31, 2008 and at December 31,2007, we had no unrecognized tax benefits. We recognize interest assessed by
taxing authorities as a component of interest expense. We recognize any
penalties assessed by taxing authorities as a component of selling, general and
administrative expenses.
Interest and penalties for the years ended December 31, 2008 and 2007
were not material.
49
We file
U.S. federal income tax returns with the Internal Revenue Service (“IRS”) as
well as income tax returns in various states. We may be subject to examination
by the IRS for tax years 2004 through 2008. Additionally, we may be subject to
examinations by various state taxing jurisdictions for tax years 2003 through
2008. We are currently not under examination by the IRS or any state tax
jurisdiction.
NOTE
12. CONTINGENCIES
AND COMMITMENTS
Litigation
In the
ordinary course of conducting business, we are involved in judicial and
administrative proceedings involving federal, state or local governmental
authorities. Actions may also be brought by individuals or groups in connection
with permitting of planned facilities, 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 fees expected to be incurred in connection
therewith. As of December 31, 2008, we did not have any ongoing, pending or
threatened legal action that management believes would have a material adverse
effect on our financial position, results of operations or cash
flows.
Operating
Leases
Lease
agreements primarily cover rail cars and office space. Future minimum lease
payments on non-cancellable operating leases as of December 31, 2008 were as
follows:
$s
in thousands
2009
$
2,082
2010
826
2011
201
2012
110
2013
81
Thereafter
123
$
3,423
Rental
expense from continuing operations amounted to $3.5 million, $4.4 million and
$2.5 million during 2008, 2007 and 2006, respectively.
50
NOTE
13. EQUITY
Stock
Options
We have
three stock option plans, the 1992 Stock Option Plan for Employees (“the 1992
Employee Plan”), the 1992 Director Stock Option Plan (“the 1992 Director Plan”)
and the 2008 Stock Option Incentive Plan (“the 2008 Stock Option Plan”) which
was approved by our stockholders in May 2008. In March 2005, the Board of
Directors cancelled the 1992 Director Plan except for the options then
outstanding. These plans were developed to provide additional incentives through
equity ownership in AEC and, as a result, encourage employees to contribute to
our success. The following table summarizes our stock option plan activity for
each of the years ended December 31:
$s
in thousands, except per share amounts
2008
2007
2006
Outstanding
at beginning of period
266,376
291,900
567,320
Granted
3,400
52,976
166,000
Exercised
(53,774
)
(51,000
)
(421,420
)
Cancelled
or expired
(10,000
)
(27,500
)
(20,000
)
Outstanding
at end of period
206,002
266,376
291,900
Weighted
average exercise
price
of options:
Beginning
of period
$
17.10
$
13.43
$
4.84
Granted
$
28.52
$
22.67
$
21.74
Exercised
$
20.37
$
6.44
$
4.75
Cancelled
or expired
$
1.47
$
8.63
$
21.74
Outstanding
at end of period
$
17.19
$
17.10
$
13.43
Exercisable
at end of period
125,957
124,077
145,900
Available
for future grant
1,496,600
-
42,976
Intrinsic
value of option exercised
$
546
$
583
$
6,223
Aggregate
intrinsic value of options outstanding
$
922
$
1,700
$
1,955
Aggregate
intrinsic value of options exercisable
$
922
$
1,502
$
1,955
Outstanding
options
Exercisable
options
Weighted
average
remaining
Weighted
Weighted
contractual
average
average
Number
of
life
exercise
Number
of
exercise
Range
of exercise prices
Shares
(in
years)
price
Shares
price
2.13
- 2.42
20,000
1.4
$ 2.27
20,000
$ 2.27
$3.75
- $3.92
22,200
2.1
$ 3.81
22,200
$ 3.81
$9.20
- $12.15
20,000
5.6
$ 10.31
20,000
$ 10.31
$20.27
- $21.74
101,426
7.7
$ 21.63
48,182
$ 21.74
$23.48
38,976
8.9
$ 23.48
15,575
$ 23.48
$28.52
3,400
9.4
$ 28.52
-
$ -
Effective
January 1, 2006, we adopted the provisions of SFAS 123 R for our
share-based compensation plans. Under SFAS 123 R, all share-based compensation
is measured at the grant date based on the fair value of the award, and is
recognized as an expense in earnings over the requisite service
period.
We
adopted SFAS 123 R using the modified prospective method. Under this transition
method, compensation expense includes the expense for all share-based awards
granted prior to, but not yet vested as of January 1, 2006. At January 1, 2006,
414,650 of our options to purchase common stock were vested and exercisable
resulting in no compensation expense being recognized. The 152,670 unvested
options to purchase common stock at January 1, 2006 became fully vested and
exercisable by March 31, 2006 and we recognized $46,932 of compensation expense
in selling, general and administrative expense related to option vesting in the
three months ended March 31, 2006.
51
During
2008, we granted 3,400 non-qualified stock options to a non-employee
director. These
options expire in the year 2018 and vest over one year contingent on the
non-employee director attending a minimum of seventy-five percent of regularly
scheduled board meetings during the year. In 2007, we granted 52,976 incentive
and non-qualified stock options to purchase AEC common stock to members of our
management team. These options expire in the year 2017 and vest over periods of
two or three years. In 2006, we granted 166,000 incentive and non-qualified
stock options to purchase AEC common stock to members of our management team.
These options expire in the year 2016 and vest one-third annually over three
years. Compensation expense related to stock options for the years ended
December 31, 2008, 2007 and 2006 were as follows:
2008
2007
2006
Stock-based
compensation recorded in selling, general and
administrative
expense
$
474,435
$
370,335
$
222,092
Stock-based
compensation recorded in other direct costs
5,087
5,087
4,935
Total
stock-based compensation expense
$
479,522
$
375,422
$
227,027
The fair
value of each option grant is estimated using the Black-Scholes option-pricing
model with the following weighted-average assumptions:
2008
2007
2006
Expected
life
3.2
years
3.2
years
3.5
years
Expected
volatility
40%
40%
52%
Risk-free
interest rate
2.7%
3.5%
5.0%
Expected
dividend yield
2.6%
3.0%
3.1%
Weighted-average
fair value of options
granted
during the period
$7.29
$5.81
$7.63
Restricted
Stock Plans
We have
two restricted stock plans: the Amended and Restated 2005 Non-Employee Director
Compensation Plan (the “Director Plan”) and the 2006 Restricted Stock Plan (the
“Employee Plan”). The Director Plan establishes the cash compensation that each
non-employee board member receives. In addition, the Director Plan provides that
each non-employee director receive an annual award of the number of shares of
restricted stock with a value equal to $25,000 on the date of grant with a
one-year vesting period. In April 2008, the Director Plan was amended to allow
each non-employee director to elect to receive their annual equity based award
in either shares of restricted stock under the Director Plan or an equivalent
dollar value of stock options under the 2008 Stock Option Plan with a one-year
vesting period. Vesting is also contingent on the non-employee
director attending a minimum of seventy-five percent of regularly scheduled
board meetings during the year. 200,000 shares of common stock have been
authorized for issuance under the Director Plan. As of December 31, 2008, 30,600
shares of restricted stock were issued to the non-employee directors and 169,400
shares of stock remained available for issuance under the Director
Plan.
The
Employee Plan provides that employees are eligible for restricted stock grants
at the discretion of the Board of Directors. 200,000 shares of common stock have
been authorized for issuance under the Employee Plan. During 2008, no shares of
restricted stock were granted to employees. In 2007, we granted
14,500 shares of restricted stock, net of forfeitures. Of the 14,500
shares of restricted stock granted in 2007, 200 shares vest one-third annually
over three years, 7,150 shares vest over one year and 7,150 shares were fully
vested on the grant date. During 2006, we granted 6,234 shares of
restricted stock, 5,300 shares that vest one-third annually over three years and
934 shares that vest over one year. As of December 31, 2008, 19,800 shares of
restricted stock were issued to the employees and 180,200 shares of stock
remained available for issuance.
52
The table
below summarizes restricted stock activity and related expense for the years
ended December 31, 2008, 2007 and 2006.
2008
2007
2006
Shares
Weighted
Average
Grant
Date
Fair
Value
Shares
Weighted
Average
Grant Date
Fair
Value
Shares
Weighted
Average
Grant
Date
Fair
Value
Outstanding
at beginning of period
17,408
$
22.20
12,300
$
23.75
14,700
$
12.10
Granted
4,500
28.52
21,500
22.72
13,234
23.75
Vested
(15,460
)
22.31
(15,892
)
23.95
(12,600
)
12.10
Cancelled
or expired
-
-
(500
)
21.53
(3,034
)
16.61
Outstanding
at end of period
6,448
$
26.34
17,408
$
22.20
12,300
$
23.75
Available
for future grant
349,600
354,100
375,100
Compensation
expense recognized in:
Other
direct costs
$
7,892
$
9,066
$
1,160
Selling,
general & administrative
$
332,614
$
358,577
$
164,213
Unearned
compensation
$
68,111
$
279,122
$
168,230
Treasury
Stock
On
October 28, 2008, our Board of Directors authorized a program to repurchase up
to 600,000 shares of the Company’s outstanding common stock through December 31,2008. On December 11, 2008, the program was extended from December31, 2008 to February 28, 2009. On February 23, 2009, the program was extended
from February 28, 2009 to December 31, 2009. Stock repurchases under the program
may be made in the open market or through privately negotiated transactions at
times and in such amounts as the Company deems to be appropriate. In
2008, we repurchased 155,175 shares at an average cost of $16.68 per
share. As of December 31, 2008, there were 444,825 shares remaining
for repurchase under the program.
NOTE
14. CALCULATION
OF EARNINGS PER SHARE
$s
and shares in thousands, except per share amounts
2008
2007
2006
Basic
Diluted
Basic
Diluted
Basic
Diluted
Net
income
$
21,498
$
21,498
$
19,396
$
19,396
$
15,889
$
15,889
Weighted
average common
shares
outstanding
18,236
18,236
18,217
18,217
18,071
18,071
Dilutive
effect of stock options and
restricted
stock
54
40
131
Weighted
average
shares
outstanding
18,290
18,257
18,202
Earnings
per share
$
1.18
$
1.18
$
1.06
$
1.06
$
0.88
$
0.87
Anti-dilutive
shares
excluded
from calculation
83
166
151
53
NOTE
15. OPERATING
SEGMENTS
We
operate with two segments, Operating Disposal Facilities, and Non-Operating
Disposal Facilities. These segments reflect our internal reporting structure and
nature of services offered. The Operating Disposal Facility segment represents
disposal facilities accepting hazardous and radioactive waste. The Non-Operating
Disposal Facility segment represents facilities which are not accepting
hazardous and/or radioactive waste or formerly proposed new
facilities.
Income
taxes are assigned to Corporate, but all other items are included in the segment
where they originated. Inter-company transactions have been eliminated from the
segment information and are not significant between segments.
Summarized
financial information concerning our reportable segments is shown in the
following table:
In June
2005, we entered into a contract with Honeywell International, Inc. to
transport, treat, and dispose of approximately 1.2 million tons of chromite ore
processing residue through November 2009. Waste disposal at our Grand View,
Idaho facility began in July 2005. A $3.5 million advance payment was received
and has been credited back to Honeywell during the contract term. The contract
provides that we will receive 99% of the material shipped off-site for disposal
and provides for deficiency fees when Honeywell is unable to meet minimum volume
requirements, or if we are unable to take waste provided which has not occurred.
Similar contract terms were also entered into by us and our trucking
subcontractor.
As of
December 31, 2008, Honeywell has shipped and we have disposed of approximately 1
million tons of material under the contract.
55
NOTE
17. QUARTERLY
FINANCIAL DATA
The
unaudited consolidated quarterly results of operations for 2008 and 2007
were:
Three-Months
Ended
Mar.
31,
June
30,
Sept.
30,
Dec.
31,
Year
$s
and shares in thousands, except per share data
2008
Revenue
$
46,219
$
44,516
$
41,051
$
44,041
$
175,827
Gross
profit
13,444
13,578
10,021
12,398
49,441
Operating
income
9,525
9,846
6,812
8,338
34,521
Net
income
5,868
6,110
4,271
5,249
21,498
Earnings
per share—diluted
(1)
$
0.32
$
0.33
$
0.23
$
0.29
$
1.18
Weighted
average common shares
outstanding
used in the diluted
earnings
per share calculation
18,277
18,295
18,330
18,258
18,290
2007
Revenue
$
38,964
$
41,267
$
39,427
$
45,862
$
165,520
Gross
profit
11,514
11,653
10,268
12,078
45,513
Operating
income
7,915
8,179
6,632
8,141
30,867
Net
income
4,935
5,084
4,518
4,859
19,396
Earnings
per share—diluted
(1)
$
0.27
$
0.28
$
0.25
$
0.27
$
1.06
Weighted
average common shares
outstanding
used in the diluted
earnings
per share calculation
18,253
18,254
18,257
18,262
18,257
_______________________
(1)
Diluted
earnings per common share for each quarter presented above are based on
the respective weighted average number of common shares for the respective
quarter. The dilutive potential common shares outstanding for each period
and the sum of the quarters may not necessarily be equal to the full year
diluted earnings per common share
amount.
Item
9. Changes In and Disagreements with Accountants on Accounting
and Financial Disclosure
None
Item
9A. Controls and Procedures
An
evaluation was performed under the supervision and with the participation of the
Company’s management, including its Chief Executive Officer, or CEO, and Chief
Financial Officer, or CFO, of the effectiveness of the Company’s disclosure
controls and procedures, as such term is defined under Rule 13a-15e under the
Securities Exchange Act of 1934, as amended (the “Exchange Act”) as of December31, 2008. Based on that evaluation, the Company’s management, including the CEO
and CFO, concluded that the Company’s disclosure controls and procedures are
effective to provide reasonable assurance that information required to be
disclosed by the Company in reports that it files or submits under the Exchange
Act is recorded, processed, summarized and reported as specified in Securities
and Exchange Commission rules and forms and that such information is accumulated
and communicated to the Company’s management, including the CEO and CFO, or
persons performing similar functions, as appropriate to allow timely decisions
regarding required disclosure.
There
were no changes in the Company’s internal control over financial reporting
identified in connection with the evaluation of such controls that occurred
during the Company’s most recent fiscal quarter that has materially affected, or
is reasonably likely to materially affect, the Company’s internal control over
financial reporting.
Management’s Annual Report on
Internal Controls over Financial Reporting.
Management
is responsible for and maintains a system of internal controls over financial
reporting that is designed to provide reasonable assurance that its records and
filings accurately reflect the transactions engaged in Section 404 of
Sarbanes-Oxley Act of 2002 and related rules issued by the US SEC requiring
management to issue a report on its internal controls over financial
reporting.
There are
inherent limitations in the effectiveness of any internal control, including the
possibility of human error and the circumvention or overriding of controls.
Accordingly, even effective internal control can provide only reasonable
assurance with respect to financial statement preparation. Further, because of
changes in conditions, the effectiveness of internal controls may vary over
time.
Management
has conducted an assessment of its internal controls over financial reporting
utilizing the criteria set forth by the Committee of Sponsoring Organizations
(“COSO”) of the Treadway Commission in Internal Control – Integrated Framework
and concluded that, as of December 31, 2008, the internal controls over
financial reporting were operating effectively.
Our
independent registered public accounting firm, Moss Adams LLP, has audited the
effectiveness of internal control over financial reporting as of December 31,2008, as stated in their report, which is included in Part II, Item 8 of this
Annual Report on Form 10-K.
Item
9B. Other Information
None
57
PART
III
Item
10. Directors,
Executive Officers and Corporate Governance.
The
information regarding directors and nominees for directors of the Company,
including identification of the members of the audit committee and audit
committee financial expert, is presented under the headings “Corporate
Governance—Committees of the Board of Directors,” and “Election of
Directors—Nominees For Directors” in the Company’s definitive proxy statement
for use in connection with the 2009 Annual Meeting of Stockholders (the “Proxy
Statement”) to be filed within 120 days after the end of the Company’s fiscal
year ended December 31, 2008. The information contained under these
headings is incorporated herein by reference. Information regarding the
executive officers of the Company is included in this Annual Report on
Form 10-K under Item 1 of Part I as permitted by Instruction 3 to Item
401(b) of Regulation S-K.
We have
adopted a code of conduct that applies to our Chief Executive Officer and Chief
Financial Officer. This code of conduct is available on our Web site at www.americanecology.com. If we make any amendments
to this code other than technical, administrative or other non-substantive
amendments, or grant any waivers, including implicit waivers, from a provision
of this code to our Chief Executive Officer or Chief Financial Officer, we will
disclose the nature of the amendment or waiver, its effective date and to whom
it applies in a report filed with the SEC.
Item
11. Executive
Compensation.
Information
concerning executive and director compensation is presented under the headings
“Compensation Discussion and Analysis” in the Proxy Statement. The information
contained under these headings is incorporated herein by reference.
58
Item
12. Security
Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters.
Information
with respect to security ownership of certain beneficial owners and management
is set forth under the heading “Security Ownership of Certain Beneficial Owners
and Directors and Officers” in the Proxy Statement. The information contained
under these headings is incorporated herein by reference.
The
following table provides information as of December 31, 2008 about the
common stock that may be issued under all of our existing equity compensation
plans, including the 1992 Employee Stock Option Plan, 1992 Director Stock Option
Plan, 2005 Non-Employee Director Compensation Plan, the 2006 Restricted Stock
Plan and the 2008 Stock Option Incentive Plan. All of these plans have been
approved by our stockholders.
Number
of securities to be issued upon exercise of outstanding options, warrants
and rights
(a)
(1)
Weighted-average
exercise price of outstanding options, warrants and rights
(b)
(2)
Number
of securities remaining available for future issuance under equity
compensation plans (excluding securities reflected in column
(a))
(c)
Equity
stock option compensation
plans
approved by security
holders
212,450
$ 17.19
1,846,200
Equity
compensation plans
not
approved by security
holders
-
-
-
Total
212,450
$ 17.19
1,846,200
______________________
(1)
Includes
6,448 shares of unvested restricted stock awards outstanding under the
2005 Non-Employee Director Compensation Plan and 2006 Restricted Stock
Plan.
(2)
The
weighted-average exercise price does not take into account the shares
issuable upon vesting of outstanding restricted stock awards, which have
no exercise price.
Item
13. Certain
Relationships and Related Transactions and Director Independence.
Information
concerning related transactions is presented under the heading “Certain
Relationships and Related Transactions” in the Proxy Statement. The information
contained under this heading is incorporated herein by reference.
Item
14. Principal Accountant Fees and Services.
Information
concerning principal accountant fees and services is presented under the heading
“Ratification of Appointment of Independent Registered Public Accountant” in the
Proxy Statement. The information contained under this heading is incorporated
herein by reference.
Item
15. Exhibits and Financial Statement Schedules.
(a)
The
following documents are filed as part of this
report:
1)
Consolidated
Financial Statements: See Index to Consolidated Financial Statements at
Item 8 on page 35 of this
report.
2)
Financial
Statement Schedules. Schedules have been omitted because they are not
required or because the information is included in the financial
statements at Item 8 on page 35.
Pursuant
to the requirements of Section 13 or 15(d) 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.
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities indicated as of February 25, 2009.
