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SECURITIES REGISTERED PURSUANT
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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
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reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
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
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was required to file such reports), and (2) has been
subject to such filing requirements for the past
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Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
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.
Indicate by check mark whether the registrant is a large
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or a smaller reporting company. See definition of “large
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The aggregate market value of the Registrant’s voting stock
held by non-affiliates on June 29, 2007 was approximately
$347.9 million based on the closing price of $21.42 per
share as reported on the NASDAQ Global Market System.
At February 25, 2008, Registrant had outstanding
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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:
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, potential loss of major contracts, loss of key personnel,
compliance with and changes in applicable laws and regulations,
access to cost effective and timely transportation services,
competitive factors, impact of general economic trends on our
business, access to insurance and financial assurances, exposure
to litigation, ability to obtain timely regulatory approvals to
construct additional disposal space, emergence of new
technologies, our ability to meet contractual commitments,
ability to pay future dividends and impacts of integration of
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.
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, it
should not be assumed 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.
Item 1.
Business
General
The table below contains definitions that are used throughout
this Annual Report on
Form 10-K.
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
TSCA
Toxic Substance Control Act of 1976
USACE
U.S. Army Corps of Engineers
US EPA
U.S. Environmental Protection Agency
WUTC
Washington Utilities and Transportation Commission
AEC, through our subsidiaries, provides radioactive, hazardous,
PCB and industrial waste management services to commercial and
government entities, such as refineries and chemical production
facilities, manufacturers, electric utilities, steel mills,
medical and academic institutions. Headquartered in Boise,
Idaho, we are one of the nation’s oldest providers of
radioactive and hazardous waste services. AEC and its
predecessor companies have been in business for more than
50 years. We operate nationally and employed
238 people as of December 31, 2007.
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”) and US Ecology Idaho, Inc., a
Delaware corporation (“USEI”). American Ecology
Recycle Center, Inc., a Delaware corporation (“AERC”)
previously operated our discontinued Oak Ridge, Tennessee LLRW
processing and related field services business.
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 and LLRW and
include our RCRA hazardous waste treatment and disposal
facilities in Beatty, Nevada; Grand View, Idaho; and Robstown,
Texas; and our LLRW disposal facility in Richland, Washington.
Each of the 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, 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. Financial information with respect
to each segment is further discussed in Note 15 —
Operating Segments of the Consolidated Financial Statements.
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, 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: State of Nevada is licensee
USE
Sheffield, Illinois
Closed LLRW disposal facility: 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 attributable to
waste
clean-up
projects (“Event Business”) which vary substantially
in size and duration. 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.
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 the
years ended December 31, 2007 and 2006, Event Business
contributed approximately 54% and 51% of revenue, respectively,
and Base Business represented approximately 46% and 49% of
revenue, respectively. 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.
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 2 miles east of the
facility, which is used as a clay source for disposal unit liner
construction and 189 acres used by our rail transfer
station located approximately 30 miles northeast of the
disposal site. The facility is permitted to accept hazardous and
non-hazardous waste, including those regulated under RCRA and
TSCA. This facility is also permitted to accept certain NORM and
NARM radioactive material and LARM exempted from NRC regulation,
including certain “mixed” hazardous and radioactive
waste generated
by commercial and government customers. This includes waste
received under our USACE contract. We also have rights to a
patented technology to 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
US EPA.
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 operate
a rail transfer station. This rail transfer station began
operations in 2006. This facility is permitted to accept
hazardous and non-hazardous waste, including those regulated
under RCRA. The facility is regulated under a permit issued by
the TCEQ and is permitted to accept certain LARM and mixed
wastes. Waste treatment services were temporarily suspended
following a fire at the treatment facility in July 2004. Partial
treatment services resumed in December 2004 and full scale
treatment operations were initiated in a new treatment facility
in August 2005.
Beatty, Nevada RCRA/TSCA Facility. Our Beatty,
Nevada Facility began receiving hazardous waste in 1970 and 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 15 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 our existing 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 US EPA. The State of Nevada
assesses disposal fees to fund a dedicated trust account to pay
for certain 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 produced within the eight state
Northwest Interstate Compact region. 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.
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
government for long-term institutional control. We now maintain
the facility under a contract with the State of Nevada and are
paid from a dedicated, state-controlled trust fund.
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
performing closure work, we monitored and maintained the
site until 2001 when the LLRW license was transferred to the
State of Illinois. We have a contract with the State of Illinois
to perform long-term care work.
Sheffield, Illinois RCRA Site. We previously
operated two hazardous waste disposal areas adjacent to the
Sheffield LLRW disposal area. The first opened in 1968 and
ceased accepting waste in 1974. The second accepted hazardous
waste from 1974 through 1983. Groundwater remediation work is
performed by the Company at the site. The Company expects to
continue its work at the site for approximately 19 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. We own an
additional 286 acres adjacent to the permitted site.
Ward Valley, California Formerly Proposed LLRW Disposal
Facility. In 1993, we received a State of
California license to construct and operate this facility for
the Southwestern LLRW Compact. In 2000, we filed suit in state
court alleging that the State of California abandoned its duty
to acquire the project site from the federal government. The
trial court ruled against us in March 2003. Based on this
adverse ruling, we wrote off a $21 million deferred site
development asset in 2003. The matter is closed.
Butte, Nebraska Formerly Proposed LLRW Disposal
Facility. We applied to the State of Nebraska to
construct and operate this facility under contract to the
Central Interstate LLRW Compact Commission (the
“CIC”). Following license denial by the State of
Nebraska, the CIC, AEC and certain electric utilities funding
the project sued the State of Nebraska alleging bad faith in the
license review process. In 2002, the federal district court
awarded the plaintiffs $153 million in damages, including
amounts owed to us based on our contributions to the project and
pre-judgment interest. In 2004, the State of Nebraska and the
CIC entered into a settlement which resulted in the State of
Nebraska paying the CIC $154 million. We received
$11.8 million from the CIC on August 1, 2005. The
matter is closed.
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 many of the 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 and
clean-up
project schedules. 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
focus on strategic initiatives to control our variable costs,
expand our service lines, expand our waste throughput
capabilities, build our 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;
•
gaining access to patented steel mill waste delisting technology
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, construction of a second
truck-to-rail transload building in Idaho and developing a new
rail 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; and
•
opening an organic chemical waste treatment laboratory in Texas
to improve treatment “recipes” and reduce costs at all
three of our RCRA facilities.
Our Richland, Washington disposal facility, serving the
Northwest and Rocky Mountain Compacts, is one of only two
operating Compact disposal facilities in the nation. Both were
in full operation for decades before passage of the federal LLRW
Policy Act. While the Richland, 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 a competitor, is located in the
three state Atlantic Compact but can also accept waste from
other states. Under current state law, the Barnwell site will
only serve the Atlantic Compact after July 2008. LLRW from
states outside the Northwest Compact region is primarily shipped
to a non-compact, commercial disposal a site in Utah operated by
a competitor.
Pricing levels at the three LLRW disposal facilities described
above heightened demand for more cost-effective disposal of
soil, debris, consumer products, industrial wastes and other
materials containing LARM including wastes exhibiting both
hazardous and radioactive properties. In addition to commercial
demand, a substantial amount of LARM is generated by federal
government
clean-up
projects. The NRC, US EPA and USACE have all authorized the use
of hazardous waste disposal facilities to dispose of certain
LARM, leading to continued expansion of this safe,
cost-effective alternative. Our Grand View, Idaho RCRA hazardous
waste facility has significantly increased waste throughput
based on permit modifications allowing expanded acceptance of
LARM. Our Robstown, Texas disposal facility is also permitted to
accept, on a more limited basis, such material. We believe we
are well positioned to continue growing our LARM business based
on our:
•
industry reputation;
•
existing permits, which can also be modified to allow additional
waste types;
•
excellent 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 state, federal and
local environmental, health, safety, and transportation laws,
regulations, permits and licenses administered by federal, state
and local government agencies. The responsible 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. We experienced no
regulatory enforcement actions or fines in 2007.
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 US EPA,
which may delegate authority to state agencies. Chemical
compounds and residues derived from listed industrial processes
are subject to RCRA standards unless they are delisted through
rulemaking such as the patented steel mill treatment 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
face the same liabilities, we believe that they are motivated to
minimize the number of disposal sites used. Disposal facilities
require US EPA 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 US EPA. Our Grand View, Idaho and Beatty, Nevada disposal
facilities have TSCA permits. Our Texas facility may accept
PCB-contaminated waste under certain conditions including PCB
concentrations not requiring a TSCA disposal permit.
The Atomic Energy Act of 1954 (“AEA”) and the Energy
Reorganization Act of 1974 assign the NRC with regulatory
authority over the 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.
In 2004, Washington State voters approved an initiative
referendum codified in state law as the
Clean-up
Priority Act. The law, which primarily addresses
U.S. Department of Energy facilities, prohibits sites where
mixed radioactive and hazardous wastes are disposed from adding
off-site waste until
clean-up is
performed. The law provides that the Washington State’s
obligations under the Northwest LLRW Compact shall not be
adversely affected, and does not directly address NORM/NARM. The
law was struck down in its entirety by a federal court ruling.
The State of Washington has appealed. We do not believe that the
outcome of this appeal will have a material adverse affect on
our Richland, Washington facility.
The Energy Policy Act of 2005 (Public Law
109-58)
amended the AEA to classify discrete NORM/NARM as byproduct
material. The law applies to interstate Compacts ratified under
the LLRW Policy Act. We do not believe NRC regulations issued in
2006 to implement the law will materially affect our business.
Obtaining authorization to construct and operate new radioactive
or hazardous waste facilities can be a lengthy and complex
process. We believe we have demonstrated significant expertise
in this area. We also believe we possesses all permits, licenses
and regulatory approvals currently 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 and obtain 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.
Existing 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, 2007, 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 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
continue renewing these policies, if we were 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, 2007, we have provided
collateral of $4.9 million in funded trust agreements,
issued $4.0 million in letters of credit for financial
assurance and have insurance policies of approximately
$32 million for closure and post-closure obligations. While
we have been able to obtain financial assurance for our current
operations, 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.
Significant
Customers
We dispose of LARM and hazardous waste under a multi-year
contract with the USACE. We also arrange transportation of waste
to our disposal facilities for multiple customers, including
steel mills, which contributes significant revenue. In June
2005, we entered into a long-term 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
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 2007, 2006 or 2005:
Percent of Revenue
Customer
2007
2006
2005
Honeywell International, Inc.
41
%
38
%
9
%
U.S. Army Corps of Engineers
6
%
10
%
27
%
Markets
Disposal Services. Waste containing heavy
metals and 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 less expensive, on a per mile basis, than
waste transported by truck. Hazardous waste containing organic
chemical compounds is less of a commoditized service. NRC-exempt
radioactive material services are also less sensitive to these
factors.
Our Robstown, Texas hazardous waste facility is well positioned
to serve refineries, chemical production plants and other
industries concentrated on the Texas Gulf coast. The facility
also accepts certain NORM and LARM. In 2006, we constructed a
new rail transfer station approximately five miles from this
facility that extends the facility’s geographic reach by
allowing us to compete for
clean-up
projects throughout the eastern United States. In 2007, the
facility expanded its laboratory capabilities to include
analysis of organic chemical compounds, which are contained in
many of the wastes produced by customers served by the facility.
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 thermal treatment services,
primarily to customers in western states, as a cost-effective
alternative to incineration.
Our Grand View, Idaho facility accepts wastes from across the
nation and operates an owned rail transfer station located
adjacent to a main east-west rail line. Waste throughput has
been significantly enhanced by the addition of a rail track
expansion and the construction of a second rail —
to-truck indoor transfer building in 2006. The Grand View
facility’s primary markets are event
clean-up
projects, LARM, steel mill air pollution control dust and mixed
wastes. Permit modifications have expanded LARM services.
Substantial waste volumes are received under our contract with
Honeywell that is expected to last through November 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
beyond 2009 under the same terms. The USACE generally expects
the federal
clean-up
program funding the contract to continue beyond 2016. For this
reason, we also expect to enter a follow-on contract.
To meet US EPA land disposal restrictions (“LDRs”),
waste stabilization, encapsulation, chemical oxidation and other
treatment technologies are available at our Grand View, Idaho;
Beatty, Nevada and Robstown, Texas facilities. These
capabilities allow all three sites to manage a significantly
broader spectrum of wastes than if LDR treatment was not
offered. The Beatty facility also provides thermal desorption
treatment 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 monopoly LLRW service provider in the Northwest Compact, the
State of Washington approves our disposal rates. Since NORM/NARM
is not subject to the LLRW Policy Act, we accept this waste from
all fifty states. Rate regulation does not apply since no
monopoly exists.
Competition
We compete with large and small companies in each of the markets
we serve. While niche service areas exist, the radioactive,
hazardous and non-hazardous industrial waste management industry
is highly competitive. We believe that our primary hazardous
waste disposal competitors are Clean Harbors, Inc., Waste
Control Specialists, LLC and Waste Management, Inc. We believe
that our primary radioactive material disposal competitors are
EnergySolutions 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, worker safety and credibility with
regulatory agencies;
•
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
patented technologies and niche services that favorably
distinguish us from competitors. We also believe that our strong
brand name recognition from more than five decades of
experience, strong 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.
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, 2007, we had 238 employees, of which
10 were members of the PACE union at our Richland, Washington
facility.
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:
Stephen A. Romanowas 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 has been with us for 18 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.
Simon G. Bellwas appointed Vice President of
Operations in August of 2007 and is responsible for the
Richland, Washington, Beatty, Nevada, Robstown, Texas, and Grand
View, Idaho facilities. From 2005 to August 2007, he held the
position of Vice President of Hazardous Operations and from 2002
to 2005, the Idaho facility General Manager and Environmental
Manager. He offers more than 16 years of industry
experience including service as general manager of a
competitor’s disposal facility and mining industry
experience in Idaho, Nevada and South Dakota. He holds a BS in
Geology from Colorado State University.
John M. Cooperjoined 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. Feelerwas 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.
Steven D. Wellingjoined us in February 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 also managed new market
development and sales for a national bulk chemical
transportation company. Mr. Welling holds a BS from
California State University-Stanislaus.
Eric L. Gerrattjoined 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 B.S. in Accounting from the University of Idaho.
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 and
duration. For the year ended December 31, 2007,
approximately 54% 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 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 projects 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 business, is factored into our budgeting and externally
communicated business projections. For example, approximately
one quarter of our 2008 revenue budget is comprised of unknown
new Event and Base business. Our budgeting process combines
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 result in a
material adverse affect on our business.
The
loss of one or more significant customers or contracts could
adversely affect our profitability.
Honeywell and the USACE are under multiple year contracts which
accounted for approximately 41% and 6% of our total revenues for
the year ended December 31, 2007, respectively. Honeywell
and USACE have contracts with us to provide waste services
through 2009. In October 2005, Honeywell stopped shipments and
also filed a motion in U.S. District Court, District of New
Jersey to reduce the amount of material removed from the site.
This motion was unsuccessful and Honeywell shipments resumed in
April 2006. Shipments have continued at expected levels since
that time. The Honeywell Jersey City project is estimated to
ship approximately 1.2 million tons of waste to our Grand
View, Idaho facility through November 2009. As of
December 31, 2007, we have disposed of approximately 50% of
the total estimated waste under this contract. While we believe
that the USACE will contract for our services for the duration
of the Formerly Utilized Site Remedial Action Program
(“FUSRAP”) through 2016 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
present appropriation levels could have a material adverse
affect on our business. Reduced funding and the loss of these or
other large contracts combined with failure to replace them with
similar contracts could significantly reduce our revenue
resulting in a material adverse affect on our results of
operations.
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 government regulations of federal, state and local
governments have a substantial impact on our business. Many
complex, laws rules, orders and 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 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 and regulations 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.
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.
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 strikes, 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 minimize 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. Such factors could also limit our
ability to implement our plans to increase revenue and earnings.
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 use 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 $125,000 per
individual or on an aggregate basis for the monthly population.
Accrued costs related to the self-insured health care coverage
were $184,000 and $170,000 at December 31, 2007 and 2006,
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 $75,000
self-insured retention. To the extent our insurances were unable
to meet their obligations, or our own obligations for claims
were more than we estimated, there could be a material adverse
effect to our financial condition and results of operation.
Through December 31, 2007, 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, 2007, we have provided collateral of
$4.9 million in funded trust agreements and issued
$4.0 million in letters of credit for financial assurance
insurance policies of approximately $32 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 statements 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.
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 much greater resources,
service offerings we do not provide and potentially lower
pricing. An increase in the number of commercial treatment or
disposal facilities for hazardous or radioactive waste in the
United States, or a decrease in the treatment or disposal fees
charged by competitors could negatively 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, are periodically adjusted. While no
adjustment plans are presently known, future changes may
significantly impact the competitive environment in which we
conduct our business.
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 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.
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 curtail
waste production
and/or delay
spending on plant maintenance, waste
clean-up
work and other discretionary work. Market forces may also compel
customers to cease operations or relocate to other countries,
which could adversely affect our business. Also, approximately
6% of our total 2007 revenue was generated from the USACE. The
USACE has entered into a long-term disposal contract with us
that expires in 2009. While multi-year USACE projects may
continue under the contract 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 influencing the timing of customer spending
for remedial activities; the timing of regulatory agency
decisions and judicial proceedings; changes in regulations 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.
If we
are unable to obtain timely regulatory approvals to construct
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 sites beyond currently permitted capacity requires
state regulatory agency approvals. While we have historically
been successful in receiving timely approvals for proposed
disposal facility expansions, there can be no assurance that we
will be successful in obtaining future expansion approvals in a
timely manner or at all.
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 a fines
and/or
suspension of operations.
Failure
to perform under our contracts may adversely harm our
business.
Certain contracts, including our Honeywell Jersey City project
contract, 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.
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.
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:
•
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 of the acquired business;
•
retention of key personnel and customers of the acquired
business;
•
impairments of goodwill and other intangible assets; and
•
environmental and other liabilities associated with past
operations of acquired business.
The following table describes our non-disposal related
properties and facilities at December 31, 2007 owned or
leased by us.
Location
Segment
Function
Acreage
Own/Lease
Boise, Idaho
Corporate
Corporate office
10,925 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
286 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, 2007.
Non-Permitted
Total
Permitted Airspace
Airspace
Estimate Life
Location
Own/Lease
Acreage
(Cubic Yards)
(Cubic Yards)
(in years)
Beatty, Nevada
Lease
80
1,314,500
450,000
13
Grand View, Idaho
Own
1,411
1,944,862
28,780,000
47
Robstown, Texas
Own
440
413,414
2,670,000
37
Richland, Washington(1)
Sublease
100
669,119
—
48
(1)
The Richland, Washington facility is on land subleased from the
State of Washington. Our sublease has 8 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. 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 reserves for legal and administrative matters, or fees
expected to be incurred in connection therewith. As of
December 31, 2007, 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 2007.
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 21, 2008 there were
approximately 9,960 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:
2007
2006
High
Low
High
Low
First Quarter
$
20.07
$
17.26
$
21.10
$
13.86
Second Quarter
$
22.84
$
18.64
$
27.91
$
19.22
Third Quarter
$
22.19
$
18.75
$
26.56
$
18.52
Fourth Quarter
$
25.21
$
19.85
$
22.96
$
17.80
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 2007. 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 $100 at December 31, 2002 and assumes the
reinvestment of dividends. The chart below the graph sets forth
the data points in dollars as of December 31 of each year.
We have paid the following dividends on our common stock ($s in
thousands except per share amounts):
2007
2006
Per share
Dollars
Per share
Dollars
First Quarter
$
0.15
$
2,734
$
0.15
$
2,661
Second Quarter
0.15
2,734
0.15
2,714
Third Quarter
0.15
2,734
0.15
2,721
Fourth Quarter
0.15
2,735
0.15
2,721
Total
$
0.60
$
10,937
$
0.60
$
10,817
In August 2000, we entered into a credit facility with Wells
Fargo Bank. This credit facility has been extended and amended
and currently provides us with $15.0 million of unsecured
borrowing capacity and matures on June 15, 2008. 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 an
event of default and the payment of the dividend will not result
in an event of default. No default events have occurred to date.
Equity
Compensation Plan Information
The following table provides information as of December 31,2007 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 and the 2006 Restricted
Stock Plan. All of these plans have been approved by our
stockholders.
Number of securities
remaining available for
Number of securities
future issuance under
to be issued upon
Weighted-average
equity compensation
exercise of
exercise price of
plans (excluding
outstanding options,
outstanding options,
securities reflected in
warrants and rights
warrants and rights
column (a))
(a)(1)
(b)(2)
(c)
Equity stock option compensation plans approved by security
holders
283,784
$
17.10
354,100
Equity compensation plans not approved by security holders
—
—
—
Total
283,784
$
17.10
354,100
(1)
Includes 17,408 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.
This summary should be read in conjunction with the consolidated
financial statements and related notes.
2007
2006
2005
2004
2003
$s in thousands, except for per share data
Revenue
$
165,520
$
116,838
$
79,387
$
54,167
$
57,047
Business interruption insurance claim
—
704
901
431
—
Operating income
30,867
24,458
19,432
13,148
9,749
Write-off of facility development costs
—
—
—
—
(20,951
)
Gain on settlement of litigation
—
—
5,327
—
—
Income tax expense (benefit)(1)
12,322
9,979
9,676
(8,832
)
72
Net income (loss) from continuing operations
19,396
15,889
15,438
22,363
(11,069
)
Income from discontinued operations
—
—
—
1,047
2,477
Net income (loss)
19,396
15,889
15,438
23,410
(8,592
)
Preferred stock dividends
—
—
—
—
64
Earnings (loss) per share — basic:
Continuing operations
$
1.06
$
0.88
$
0.88
$
1.30
$
(0.67
)
Discontinued operations
—
—
—
0.06
0.15
Net income
$
1.06
$
0.88
$
0.88
$
1.36
$
(0.52
)
Earnings (loss) per share — diluted:
Continuing operations
$
1.06
$
0.87
$
0.86
$
1.26
$
(0.67
)
Discontinued operations
—
—
—
0.06
0.15
Net income
$
1.06
$
0.87
$
0.86
$
1.32
$
(0.52
)
Shares used in earnings per share calculation:
Basic
18,217
18,071
17,570
17,226
16,604
Diluted
18,257
18,202
17,950
17,726
16,604
Dividends paid per share
$
0.60
$
0.60
0.30
$
0.25
$
—
Total assets
$
117,076
$
104,041
$
89,396
$
77,233
$
66,626
Working capital(2)
29,846
24,549
31,484
16,916
12,410
Long-term debt, net of current portion
27
24
—
2,734
4,200
Stockholders’ equity
83,098
73,355
63,886
51,611
36,351
Return on invested capital(3)
17.2
%
18.7
%
19.5
%
16.0
%
12.3
%
(1)
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.
(2)
Calculated as current assets minus current liabilities.
(3)
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.
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. 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 manage transportation of waste to our facilities, which
contributes significant revenue. We have been in the waste
services business for 55 years.
Our customer base can be divided into categories that may assist
in understanding period-to-period changes in our treatment and
disposal revenue. 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 during the
year ended December 31, 2007.
% of 2007
Treatment and
Disposal
Customer Category
Description
Revenue(1)
Private cleanup
Private sector event clean-up project waste.
31%
Broker
Companies that collect and aggregate waste from their direct
customers comprising both recurring base and event clean-up
waste.
23%
Federal cleanup
Government event clean-up project waste.
17%
Other industry
Catch-all category for electric utilities, chemical
manufacturers and other industries not included in other
categories. Comprised of both recurring base and remedial event
clean-up business.
11%
Rate regulated
Northwest and Rocky Mountain Compact customers paying
rate-regulated disposal fees set by the State of Washington,
typically recurring base business.
8%
Refinery
Petroleum refinery customers comprising both recurring base and
event clean-up business.
5%
Steel
Steel mill customers comprising both recurring base and event
clean-up business.
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 and
duration. For the year ended December 31, 2007,
approximately 54% 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 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 projects 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 business, is factored into our internal budgeting and
externally communicated business projections. For example,
approximately one quarter of our 2008 revenue budget is
comprised of unknown new Event and Base business. Our internal
budgeting process combines historical experience with identified
sales pipeline opportunities and planned initiatives for new or
expanded service lines.
Depending on project-specific needs, transportation services may
be offered at or near our cost to increase disposal volumes. For
waste transported by rail from New Jersey (for Honeywell),
Pennsylvania (for Molycorp) and other locations distant from our
Grand View, Idaho facility, transportation-related revenue can
easily 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
bundling strategy has allowed us to win multiple projects that
we could not otherwise have competed for successfully.
Acquisition of a Company-owned railcar fleet has reduced
transportation expenses incurred by relying solely on railcar
operating leases. Winning these project awards and the increased
waste volumes they provide increases operating leverage and
profitability at our disposal sites. While waste treatment and
other variable costs are project-specific, the contribution to
profitability from each new project award generally increases as
overall waste volumes increase. Management believes that
maximizing operating income and earnings per share is a higher
priority than
maintaining or increasing gross margin, and will continue to
aggressively bid bundled transportation and disposal services
based on this income growth strategy.
Overall Performance
On a consolidated basis, our financial performance for the year
ended December 31, 2007 (“2007”) showed
significant growth over the years ended December 31, 2006
(“2006”) and December 31, 2005
(“2005”). We believe our recent financial performance
demonstrates the success of strategies employed to expand both
our recurring Base and Event
clean-up
projects business through aggressive pricing, expanded service
offerings and increased waste throughput capacity, while
devoting sustained attention to cost control, safety, regulatory
compliance and customer service excellence.
A significant portion of our revenue is derived from government
Event
clean-up
projects, which are primarily driven by federal, state and local
government appropriations. Government Event projects include
federal Superfund projects which, like other government
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 government funding has
reduced.
We have a long-term 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 now underway before that date may continue
beyond 2009 under the same terms. The USACE generally expects
the federal
clean-up
program funding the contract to continue beyond 2016. Given our
current level of service to the USACE, we believe follow-on
contracting is likely. From time to time the US EPA 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
2007, USACE revenue declined to approximately 6% of total
revenue as compared to 10% and 27% of total revenue in 2006 and
2005, respectively. This reflects individual project timing,
reduced use of the USACE contract by the US EPA in 2007 and
significantly higher 2007 revenue from private industry
clean-up
contracts including bundled transportation services.
We believe that private sector remediation projects are driven
by economic conditions and regulatory agency enforcement actions
and settlements including regulatory enforcement actions,
judicial proceedings, availability of private funds and other
factors. To the extent privately funded remediation projects are
discretionary, management believes a healthy national economy
generally favors increased work. The economic health of a
specific industry category (e.g. refinery or steel mill
production) is also relevant, however, as is the financial
health 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 whether pricing is based on a commoditized or
more specialized “niche” service.
In 2005, we entered into a large project contract with Honeywell
to transport, treat, and dispose of a currently estimated
1.2 million tons of chromite ore processing residue through
November 2009. Treatment of metals-bearing waste is generally
commoditized, 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. Shipments were suspended in October 2005 when
Honeywell unsuccessfully sought a court ruling to reduce the
amount of waste requiring removal. Shipments resumed in April
2006. A penalty for not meeting minimum specified shipping
levels was paid to us by Honeywell for the period of
interruption. Minimum specified shipping levels have been
significantly exceeded since that time. Honeywell revenue was
41% of our total revenue in 2007.
We have historically treated and disposed of K061 from steel
mills from multiple states at our Grand View, Idaho facility.
This recurring Base Business has typically been contracted on a
multi-year basis, resulting in generally stable revenue. No
assurance can be given that steel mills will continue to follow
this approach. In 2007, steel mill Base Business revenue was up
3% from 2006. Consistent with an agreement with Envirosafe
Services of Ohio, Inc. (“ESOI”) to provide ESOI’s
K061 “delisting” technology at our Robstown, Texas
facility, we submitted the required delisting information to US
EPA. This information is under review by US EPA. No assurance
can be given that the required approvals will be obtained or
that this will result in new K061 business.
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 2007,
we increased Base Business revenue by 19% over 2006 levels.
Total Base Business revenue was approximately 46% of total 2007
treatment and disposal revenue, down from 49% in 2006. The
hazardous waste business is highly competitive and no assurance
can be given that we will retain our present Base Business
customers or continue to increase our market share.
2005-2007 year-to-year
comparisons are affected by multiple significant events
including, but not limited to:
•
Increased amounts reserved for future costs at non-operating
hazardous waste facilities in 2005, 2006 and 2007 for increased
closure cost estimates, acceleration of closure projects and
changes in estimated inflation rates.
•
Gain on settlement of litigation with the State of Nebraska in
the third quarter of 2005.
•
Settlement of a business insurance interruption claim in the
third quarter of 2006.
These events are discussed in detail below.
2007
Events
Operating and Non-operating facility closure
expenses: In 2007, we incurred $394,000 of
expenses related to changes in 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 landfill liner
system costs and soil excavation and placement costs which have
escalated faster than the rate of inflation.
2006
Events
Business interruption proceeds: We filed
business interruption claims with our insurance carrier
following a July 2004 fire in our Robstown, Texas
facility’s waste treatment building. During the third
quarter of 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 in the three months ended September 30, 2006.
Non-operating facility closure expenses: In
the fourth quarter of 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.
2005
Events
Gain on litigation settlement: We applied to
the State of Nebraska to construct and operate a LLRW disposal
facility under contract to the CIC. Following the State of
Nebraska’s denial of the license, the CIC, AEC and certain
electric utilities sued the State of Nebraska for damages. In
2002, the federal district court awarded plaintiffs
$153 million in damages, our share of which was
$12.3 million based on contributions to the project and
pre-judgment interest. Based on a 2004 settlement between the
State of Nebraska and the CIC, the State of Nebraska paid the
CIC $154 million. We received $11.8 million in August
2005, fully settling our claim and resulting in a
$5.3 million gain.
Business interruption proceeds: In 2005, we
received partial payment of $860,000 for revenue lost, and
$315,000 of reimbursed expenses due to the fire in our Robstown,
Texas facility’s waste treatment building.
Increase in amount reserved for future costs at the
Non-Operating Winona hazardous waste deep-well facility:
During the fourth quarter of 2005, we increased our estimate for
closure and post-closure costs by $542,000. The revised estimate
and increase in the related reserve was based on an independent
estimate of future remediation and environmental monitoring
expenses.
The below table summarizes our operating results and percentage
of revenues for the years ended December 31, 2007, 2006 and
2005.
2007
%
2006
%
2005
%
$s in thousands
Revenue
$
165,520
100.0
%
$
116,838
100.0
%
$
79,387
100.0
%
Transportation costs
79,326
47.9
%
47,829
40.9
%
22,302
28.1
%
Other direct operating costs
40,681
24.6
%
32,420
27.8
%
26,048
32.8
%
Gross profit
45,513
27.5
%
36,589
31.3
%
31,037
39.1
%
Selling, general and administrative expenses
14,646
8.8
%
12,835
11.0
%
12,506
15.8
%
Business interruption insurance claim
—
(704
)
(0.6
)%
(901
)
(1.2
)%
Operating income
30,867
18.7
%
24,458
20.9
%
19,432
24.5
%
Other income (expense)
Interest income
732
0.4
%
831
0.7
%
564
0.7
%
Interest expense
(3
)
(8
)
(173
)
(0.2
)%
Fire related property insurance claims, net of impairment
—
—
(49
)
(0.1
)%
Gain on litigation settlement
—
—
5,327
6.7
%
Other
122
0.1
%
587
0.5
%
13
Total other income
851
0.5
%
1,410
1.2
%
5,682
7.1
%
Income before income tax
31,718
19.2
%
25,868
22.1
%
25,114
31.6
%
Income tax expense
12,322
7.5
%
9,979
8.5
%
9,676
12.2
%
Net income
$
19,396
11.7
%
$
15,889
13.6
%
$
15,438
19.4
%
Segments
We operate within two primary segments, Operating Disposal
Facilities and Non-operating Disposal Facilities, which are
combined with our discontinued Processing and Field Services
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 minimal revenues but no profit. Corporate
generates no revenue and provides administrative, management and
support services to the other segments. 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. Detailed financial information for
our reportable segments can be found in Note 15 of the
consolidated financial statements located in
Item 8 — Financial Statements and Supplementary
Data to this
Form 10-K.
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 last year. Our
average selling price for treatment and disposal services
(excluding transportation) in 2007 was 1% lower than our average
selling price in 2006. Management believes this reflects normal
variations in service mix that are inherent to the business.
During 2007, treatment and disposal revenue from recurring Base
Business grew 19% and was 46% 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 was
54% 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 from private cleanup customers
grew approximately 93% during 2007 over the same period last
year. 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) for 2006, or $44.3 million. This
increase was partially due to the fact that Honeywell did not
ship waste in 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 April 2007 by our Beatty, Nevada site. Each of
these projects included significant bundled truck
and/or rail
transportation revenue.
Treatment and disposal revenue from our refinery customers grew
48% in 2007 as compared to 2006. This growth is directly related
to the strong production and maintenance cycles from our
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 under our USACE contract. Event
Business
clean-up
work under the USACE contract contributed 6% of total revenue
for 2007, or $10.7 million, as compared to 10% in 2006, or
$11.5 million. The decrease under the USACE contract was
due to a reduction in transportation services provided and a
reduction in shipments in 2007 from the US EPA and other federal
agencies that utilized the USACE contract. Treatment and
disposal revenue generated by USACE FUSRAP (Formerly Utilized
Sites Remedial Action Program) projects, increased by 15% in
2007 as compared to 2006. This was due primarily to delays in
USACE shipments during the third quarter of 2006 pending
appropriation of funds for the federal government’s new
fiscal year.
Rate-regulated business at our Richland, Washington low-level
radioactive waste facility increased 15% in 2007 over 2006. This
increase reflects an inflation factor increase in our
state-approved annual revenue requirement for the year and
amounts earned by our field services group.
Treatment and disposal revenue from our steel mill customers
grew 12% during in 2007, compared to 2006 as a result of an
event
clean-up
project and steady Base Business shipments.
Our broker business increased 14% in 2007 compared to 2006,
reflecting continued success executing our strategy of teaming
with national and smaller regional waste broker companies that
do not compete with us.
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.
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. Gross margin decreased
to 28% for 2007 as compared to 31% for 2006. The decrease in
gross margin was due to higher pass-through or low margin rail
and truck transportation services provided on the Honeywell
Jersey City and Molycorp Pennsylvania projects and other work
secured through the bundling 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 quarter-to-quarter 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 thermal desorption, chemical
oxidation of waste containing organic chemical compounds and
radioactive material.
Use of additives to meet US EPA treatment standards is a
variable cost dependent on the specific waste treated. Except
for disposal unit airspace, treatment additives and (to a lesser
degree) employee overtime, most other direct costs are fixed and
do not materially 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 a focus on gross margin alone 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, aided by our
Molycorp Pennsylvania contact. Gross profit and gross margin
were negatively impacted by approximately $394,000 for a charge
related to 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 negatively 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 expense 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, provision
for bad debt and administrative costs in support of the record
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 pursued to reduce costs on the Honeywell Jersey City
clean-up.
Rail project development was suspended based on increased
construction and operating cost estimates and improved economic
terms for ongoing shipping arrangements. The Company may
evaluate other New Jersey rail transfer options as future
clean-up
project opportunities arise.
Interest income and expense. Interest income
is earned on cash balances, short-term investments and notes
receivable 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) 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
and $88,000 in royalty payments. 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, $53,000 in royalty payments, $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 $2.3 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 therefore we believe it is unlikely we will be able to
utilize them in the future.
Revenue. Revenue increased 47% to
$116.8 million in 2006 from $79.4 million in 2005.
This increase was a result of increased disposal revenues at our
four operating facilities and an increase in bundled rail
transportation and disposal revenue under our contract with
Honeywell and other
clean-up
projects. In 2006, we disposed 816,000 tons of hazardous and
radioactive waste, up 3% from the 792,000 tons disposed in 2005.
The average selling price in 2006 for treatment and disposal
services excluding transportation increased 8% over 2005 levels.
This increase generally reflects normal variations in service
mix for waste requiring treatment.
During 2006, treatment and disposal revenue from recurring Base
Business grew 31% and was approximately 49% of
non-transportation revenue. Base Business was 41% of
non-transportation revenue in 2005. Event Business was unchanged
in 2006 as compared to 2005. In 2006, Event Business was 51% of
non-transportation revenue. We believe Base Business growth adds
to more predictable long-term performance due to its recurring
nature. The following table summarizes revenue growth for 2006
(both Base and Event Business) by industry customer type as
compared to 2005.
Treatment and disposal revenue from private industry customers
grew approximately 135% in 2006 over 2005. Our bundled rail
transportation and disposal contract with Honeywell was the
primary contributor to this growth. In 2006, Honeywell revenue
contributed 38% of total revenue, or $44.3 million. This
compares to 9% of total revenue in 2005, or $7 million. Our
waste broker business also grew, up 26% in 2006 over 2005. One
of our strategic initiatives is to team with waste brokers who
do not compete with us. Our federal government
clean-up
business declined 47% in 2006 as compared to 2005. This
reflected reduced shipments under our USACE contract. This
contract contributed 10% of our total revenue during 2006, or
$11.5 million, compared to 27% of 2005 revenue, or
$22 million. This decline was primarily caused by lower
than normal shipments under the USACE contract during the third
quarter of 2006 pending new federal fiscal year appropriations,
project timing on by individual
clean-up
projects and reduced use of the USACE contract by the US EPA.
Gross Profit. Gross profit in 2006 increased
by 18% to $36.6 million, compared to $31.0 million in
2005. This $5.6 million increase reflects a 3% increase in
volume and 8% increase in average selling prices in 2006. Gross
margin decreased to 31% in 2006 as compared to 39% the prior
year. This primarily reflects increased rail transportation
costs on the Honeywell project as well as normal variations in
service mix. Rail transportation expenses increased
approximately $25.5 million, or 114%, over 2005 levels.
Transportation services are often offered as a
“value-added” service with little or no margin.
Offering bundled rail transportation and disposal services allow
us to extend our geographic reach to win work for which we could
not otherwise compete. Service mix contributed to lower gross
margin due to the higher volume of commoditized waste services,
including Honeywell waste. Use of additives to meet US EPA
treatment standards is a variable cost dependent on the specific
waste treated. Except for disposal unit airspace, treatment
additives and (to a lesser extent) employee overtime, most other
direct costs are fixed and do not materially vary with changes
in waste volume. Gross profit and gross margin were also
negatively impacted by approximately $235,000 for revised
closure cost estimates at our non-operating facilities in
Winona, Texas and Sheffield, Illinois. During 2005, we
recognized $542,000 of direct operating costs at our Winona
facility from an increased cost estimate to close and monitor
the site.
Selling, General and Administrative
(“SG&A”). SG&A expense as a
percentage of total revenue declined to 11% in 2006 as compared
to 16% in 2005. In total dollars, SG&A expenses increased
3% to $12.8 million as compared to $12.5 million in
2005. The dollar increase in SG&A reflects increased
compensation costs including
stock-based incentives, insurance, consulting and legal expenses
and increased headcount to support increased business during the
year. Compensation costs also include higher sales commissions
paid on non-transportation revenue and salary increases.
Stock-based incentive compensation included stock options and
restricted common stock awarded to key employees and directors.
Effective January 1, 2006, we adopted Statement of
Accounting Standards No. 123(R), Share-Based
Payment, which required us to expense approximately $392,000
for the fair value of stock options and restricted stock.
Increases in insurance, consulting and legal expenses reflect
increased business activity in 2006 as compared with 2005.
Business insurance claim. During 2006, we
settled our business interruption insurance claim from a July
2004 fire in our Robstown, Texas facility’s waste treatment
building. The claim settled for approximately $2.1 million
of which we had previously recognized $1.3 million. After
deducting approximately $34,000 for claim preparation, the
remaining $704,000 was recognized as operating income in 2006.
No further claims are pending with respect to this matter.
Interest income and expense. Interest income
earned on cash balances, short-term investments and notes
receivable is a function of prevailing market rates and
balances. In 2006, we earned $831,000 of interest income, up
from $564,000 in 2005. This increase was due to higher average
cash and short-term investments over the year and higher
interest rate yields in 2006 as compared to 2005. Interest
expense for 2006 was $8,000, a decrease from $173,000 in 2005,
following payoff of a term loan in December 2005. 2006 interest
expense reflects capital lease financing of office equipment.
Other income (expense). Other income (expense)
is used to record business activities that are not a part of our
current year ordinary and usual revenue and expenses. 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 the sale of excess property, $53,000
in royalty payments, $50,000 in proceeds from an easement
agreement and $18,000 of other miscellaneous income. Other
income in 2005 was $13,000 from a $75,000 net loss on
sale/disposal of property, $85,000 in royalty payments and
$3,000 in miscellaneous income.
Income tax expense. Our effective income tax
rate for 2006 and 2005 was 38.6% and 38.5%, respectively. During
the year we continued to utilize our available NOLs. At
December 31, 2006, we had approximately $2.5 million
in federal NOLs remaining. This compares to the approximately
$19.9 million of federal NOLs remaining at
December 31, 2005. At December 31, 2006, we also had
approximately $2.3 million in state NOLs for which we
maintained nearly a full valuation allowance. These state NOLs
are located in states where we do little or no business, and
therefore we believe it is unlikely that we will be able to
utilize these state NOLs in the future.
Liquidity
and Capital Resources
Our principal source of cash is from operations, which on
average produced more than $6.0 million of quarterly cash
flow over the past three years. The $14.8 million in cash
and short-term investments at December 31, 2007 was
comprised of $2.2 million in short-term investments which
were not required for operations, and $12.6 million in cash
immediately available for operations.
We have a $15.0 million unsecured line-of-credit agreement
that matures in June 2008 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 the Prime
Rate or LIBOR, plus an applicable spread. We have a standby
letter of credit to support our closure and post-closure
obligation of $4 million that expires in September 2008. At
December 31, 2007, we had a borrowing capacity of
$11.0 million after deducting the outstanding letter of
credit, with no borrowings outstanding. We expect to enter into
a new unsecured line-of-credit agreement prior to the June 2008
expiration of our existing line-of-credit agreement.
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 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 is directly tied to higher disposal and
transportation revenue for 2007 as compared to 2006. Longer
payment cycles for the Honeywell Jersey City project contributed
to the increase in accounts receivable in 2007, during which
days sales outstanding increased to 63 days as of
December 31, 2007, compared to 61 days at
December 31, 2006.
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 were attributable to 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.
In 2005, net cash provided by operating activities was
$20.2 million. This was primarily attributable to net
income of $15.4 million, utilization of deferred tax assets
and income tax receivable totaling $7.1 million, an
increase in accounts payable and accrued liabilities of
$3.3 million and an increase in accrued salaries and
benefits of $616,000. These amounts were partially offset by
increases in accounts receivable (net of the increase in
deferred revenue) of $4.1 million, increases in other
assets and payments on our closure post-closure obligations. Use
of NOLs in 2005 resulted in a reduction of our deferred tax
assets. Increases in accounts payable and accrued liabilities
reflect timing of payments and a $3.5 million pre-payment
deposit on the Honeywell Jersey City project contract. The
increase in accrued salaries and benefits was a result of
increased incentive compensation earned during 2005, but not
paid until 2006. The increase in accounts receivable was
attributable to revenue growth in 2005 over 2004. Increases in
other assets resulted from prepaid services on the Honeywell
project.
Investing Activities. In 2007, net cash used
in investing activities was $11.5 million. Significant
transactions affecting cash used in investing activities during
2007 include capital expenditures of $15.4 million. Capital
expenditures were primarily devoted to 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. Primary uses of cash were capital
expenditures of $19.8 million of which $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
site 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.
For 2005, net cash used in investing activities was
$11.2 million. Primary uses of cash were $19.4 million
in capital expenditures of which $5.5 million was used to
purchase gondola rail cars, $4.2 million to construct new
disposal space at our Grand View, Idaho facility and
$3.3 million to construct a new waste treatment building at
our Robstown, Texas facility. We also placed $4.8 million,
net of maturities, in short-term investments. In 2005, we
received $11.8 million in litigation settlement proceeds
from the State of Nebraska and $1.2 million from our
insurance carrier for assets lost in the July 2004 fire at our
Robstown, Texas facility.
Financing Activities. 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 was primarily attributable to dividend
payments of $10.8 million in 2006. We received
$2.0 million from the exercise of stock options and a
$2.0 million tax benefit from the exercise of non-qualified
stock options and disqualifying dispositions of stock acquired
through incentive stock options.
For 2005, net cash used in financing activities was
$7.5 million. This was comprised of $5.3 million in
dividend payments to our stockholders and the repayment of
$4.2 million of term debt. We also received
$1.3 million in proceeds from the exercise of stock options
and received $767,000 in tax benefits from the exercise of
non-qualified stock options and disqualifying dispositions of
stock acquired through incentive stock options.
AEC’s contractual obligations at December 31, 2007
mature as follows:
Payments Due by Period
1 Year
More than
Total
or less
2-3 Years
4-5 Years
5 Years
$s in thousands
Closure and post-closure obligations(1)
$
129,336
$
874
$
3,477
$
3,516
$
121,469
Operating lease commitments
4,792
2,561
1,852
216
163
Capital lease obligation
41
11
22
8
—
Total contractual obligations
$
134,169
$
3,446
$
5,351
$
3,740
$
121,632
(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 2104.
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. Also, our governance documents
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 his or her tenure as a director or officer. We also
provide guarantees and indemnifications for the benefit of our
wholly-owned subsidiaries for the satisfaction of 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 costs associated
with 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 efforts using engineering
evaluations
and interpretations of current 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 costs
required after a site is properly closed.
We estimate that our undiscounted future closure and
post-closure costs for all facilities was approximately
$129 million at December 31, 2007, with a median
payment year of 2055. 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, enacted laws and regulations and other economic
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, 2007. 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, 2007, our
weighted-average credit-adjusted risk-free interest rate was
8.2%. For financial reporting purposes, our recorded closure and
post-closure obligations were $15.1 million,
$12.8 million and $11.7 million for 2007, 2006 and
2005, respectively.
Through December 31, 2007, 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, these
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.
Another renewal condition was 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, 2007, we have issued
$4 million in letters of credit to satisfy this collateral
requirement with limits of approximately $32 million for
our operating sites. We also have $4.9 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 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
believe that undertaking our environmental obligations will not
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 revenue,
2) waste treatment revenue and 3) waste transportation
services. Waste treatment and disposal revenue results primarily
from fees charged to customers for treatment
and/or
disposal services. 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 are 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.
Our Richland, Washington disposal facility is regulated by the
Washington Utilities and Transportation Commission
(“WUTC”), which sets and regulates rates for its
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 our
evaluation of disposal volume and radioactivity projections
submitted to us by waste generators, which 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 2007 expired on December 31, 2007.
During 2007 we entered into a new rate agreement with the WUTC
that went into effect on January 1, 2008 and expires in
2013.
Disposal
Facility Accounting
In general terms, 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. The 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, 2007 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, 2007 approximated 8.2%. Final closure
and post-closure monitoring obligations are currently estimated
as being paid through 2104. During 2007, we updated several of
our assumptions. This included the estimated cost of closing
active disposal cells at our Idaho and Texas facilities and the
estimated year in which our Nevada and Texas sites will
ultimately be closed and post-closure monitoring will begin. In
addition, we placed a new disposal cell into service at our
Texas facility in the fourth quarter of 2007. These changes
resulted in a net increase to our closure post-closure
obligation of $2.0 million, an increase of
$1.9 million in retirement asset and $100,000 being
expensed as 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 $2.8 million. A
hypothetical 10% increase in our cost estimates would increase
our closure/post-closure obligation by $1.5 million.
Share
Based Payments
We grant stock options to purchase our common stock to certain
employees under our 1992 Employee Stock Option Plan. We also
grant 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 option plans from which we no longer make grants. 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. 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 are
outstanding on the adoption date and subsequently modified or
cancelled. Our results of operations for 2007 and 2006 were
impacted by the recognition of non-cash expense related to the
fair value of our share-based compensation awards. Share-based
compensation expense recognized under SFAS 123 R for 2007
and 2006 were $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 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 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 the first quarter of 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 during the
second quarter of 2007. As of December 31, 2007, we have
deferred tax assets totaling approximately $2.6 million,
net of a valuation allowance of $2.3 million and deferred
tax liabilities totaling approximately $2.5 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 been involved in litigation requiring estimates of
timing and loss potential whose timing and ultimate disposition
is controlled by the judicial process. Until August 2005 we held
a $6.5 million deferred site development asset for our
share of the monetary damages specified in an August 2004
settlement agreement between the Central Interstate Compact
Commission (“CIC”) and the State of Nebraska. In
August 2005, the State of Nebraska paid the CIC and the CIC paid
us $11.8 million fully resolving our claim. The decision to
accrue costs or write off assets is based on the pertinent facts
and our evaluation of present circumstances. As of
December 31, 2007, 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.
Accounting
for the 2004 Texas Fire
On July 1, 2004, a fire in the Robstown, Texas
facility’s waste treatment building resulted in a property
claim for property and equipment damage as well as lost revenue
from business interruption. As a result, we recognized an
impairment charge of $679,000 for the book value of assets
damaged in the fire and recognized $905,000 of property
insurance proceeds in 2004. During 2006, we reached final
settlement on our business interruption insurance claim. The
total claim was for approximately $2.1 million of which we
had previously recognized $1.3 million in our statement of
operations. The remaining $704,000, after deducting
approximately $34,000 in additional expenses related to the
claim preparation, was recognized in our statement of operations
in 2006. As of September 30, 2006, we had collected the
full settlement amount from the insurance company.
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.
We do not maintain equities, commodities, derivatives, or any
other similar instruments for trading or any other purposes, and
we also do not enter into transactions denominated in currencies
other than the U.S. Dollar.
We have minimal interest rate risk on investments or other
assets due to our preservation of capital approach to
investments. At December 31, 2007, approximately
$14.8 million was held in cash or short-term investments at
terms ranging from overnight to thirty-seven days. Together,
these items earn interest at approximately 4.4% and comprised
13% of assets as of December 31, 2007. We have no debt
obligations subject to interest rate risk except for our
available credit facility which bears a variable interest rate
of LIBOR plus an applicable margin. At December 31, 2007
and 2006, there were no outstanding borrowings on the credit
facility.
We have audited the accompanying consolidated balance sheets of
American Ecology Corporation and subsidiaries (“the
Company”) as of December 31, 2007 and 2006 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, 2007. We also
have audited American Ecology Corporation and subsidiaries’
internal control over financial reporting as of
December 31, 2007, 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, 2007 and 2006, and the
consolidated results of its operations and its cash flows for
each of the years in the three-year period ending
December 31, 2007, 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, 2007, based on
criteria established in Internal Control — Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission.
As described in Note 13 to the consolidated financial
statements, on January 1, 2006the Company adopted a new
principle of accounting for share-based payments in accordance
with Financial Accounting Standards Board Statement
No. 123 R, Share-Based Payment.
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 LARM. The
Operating Disposal Facilities segment includes our hazardous
waste treatment and disposal facilities in Beatty, Nevada; Grand
View, Idaho; and Robstown, Texas, and our LLRW and NORM/NARM
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 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, 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, management has concluded that potential
unreserved future losses on balances outstanding at year-end
will not be material
Restricted Cash. Restricted cash balances of
$4.9 million and $4.7 million at December 31,2007 and 2006, 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 fixed income securities. The balances are
adjusted to fair market value on a monthly basis.
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 revenue, 2) waste treatment revenue and
3) waste transportation services. Waste treatment and
disposal revenue results primarily from
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
fees charged to customers for treatment
and/or
disposal services. 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 are 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.
Our Richland, Washington disposal facility is regulated by the
Washington Utilities and Transportation Commission
(“WUTC”), which sets and regulates rates for its
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, 2007 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 2007, 2006 and 2005, maintenance and repair expenses
charged to continuing operations were $1.9 million,
1.7 million and $2.0 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 improvement
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.
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
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
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 monitoring 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.
Insurance. We are self-insured for health-care
coverage of employees. Stop-loss insurance is carried, which
assumes liability for claims in excess of $125,000 per
individual or on an aggregate basis for the monthly population.
Accrued costs for our self-insured health care coverage were
$184,000 and $170,000 at December 31, 2007 and 2006,
respectively. We also maintain a Pollution and Remediation Legal
Liability Policy pursuant to RCRA regulations subject to a
$250,000 self-insured retention. We are also insured for
consultant’s 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 $75,000
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.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
New
and Recently Issued Accounting
Pronouncements.
EITF 06-3. In
June 2006, the Emerging Issues Task Force (“EITF”)
issued
EITF 06-3,
How Taxes Collected from Customers and Remitted to
Governmental Authorities Should Be Presented in the Income
Statement (That Is, Gross versus Net Presentation)
(“EITF 06-3”).
EITF 06-3
provides guidance on the presentation in the income statement of
any tax assessed by a governmental authority that is directly
imposed on a revenue-producing transaction between a seller and
a customer.
EITF 06-3
requires that taxes be presented in the income statement either
on a gross basis (included in revenue and costs) or a net basis
(excluded from revenue), and that this accounting policy
decision be disclosed. The Company’s accounting policy is
to present the taxes within the scope of
EITF 06-3
on a net basis. The adoption of
EITF 06-3
in the first quarter of 2007 did not result in a change to the
Company’s accounting policy and, accordingly, did not have
any impact on the Company’s consolidated financial
statements.
FIN 48. In July 2006, the FASB issued
Interpretation No. 48, Accounting for Uncertainty in
Income Taxes-an Interpretation of FASB Statement No. 109
(“FIN 48”), which clarifies the accounting
for uncertainty in income taxes recognized in the financial
statements in accordance with FASB Statement No. 109,
Accounting for Income Taxes. FIN 48 provides
guidance on the financial statement recognition and measurement
of a tax position taken or expected to be taken in a tax return.
FIN 48 also provides guidance on de-recognition,
classification, interest and penalties, accounting in interim
periods, disclosures, and transition. We adopted FIN 48
effective on January 1, 2007 and this adoption did not
impact our consolidated financial statements. See Note 11
— Income Taxes.
SFAS 157. In September 2006, the FASB
issued SFAS No. 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. On February 8, 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 nonfinancial liabilities to fiscal years beginning
after November 15, 2008. We will adopt SFAS 157 in the
first quarter of 2008 and are currently evaluating the impact of
this statement on our consolidated financial statements.
FSP
EITF 00-19-2. In
December 2006, the FASB issued FASB Staff Position
EITF 00-19-2,
Accounting for Registration Payment Arrangements
(“FSP
EITF 00-19-2”).
FSP
EITF 00-19-2
specifies that the contingent obligation to make future payments
or otherwise transfer consideration under a registration payment
arrangement, whether issued as a separate agreement or included
as a provision of a financial instrument or other agreement,
should be separately recognized and measured in accordance with
FASB Statement No. 5, Accounting for Contingencies.
A registration payment arrangement is defined in FSP
EITF 00-19-2
as an arrangement with both of the following characteristics:
(1) the arrangement specifies that the issuer will endeavor
(a) to file a registration statement for the resale of
specified financial instruments
and/or for
the resale of equity shares that are issuable upon exercise or
conversion of specified financial instruments and for that
registration statement to be declared effective by the SEC
within a specified grace period,
and/or
(b) to maintain the effectiveness of the registration
statement for a specified period of time (or in perpetuity); and
(2) the arrangement requires the issuer to transfer
consideration to the counterparty if the registration statement
for the resale of the financial instrument or instruments
subject to the arrangement is not declared effective or if
effectiveness of the registration statement is not maintained.
FSP
EITF 00-19-2
is effective for registration payment arrangements and the
financial instruments subject to those arrangements that are
entered into or modified subsequent to December 21, 2006.
We do not have any registration payment arrangements as defined
by FSP
EITF 00-19-2
and as a result the adoption of this standard did not have any
impact on our consolidated financial statements.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
SFAS 159. In February 2007, the FASB
issued SFAS No. 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 No. 159 is effective for fiscal years
beginning after November 15, 2007 and will be adopted by
the Company beginning in the first quarter of fiscal 2008. We
are currently evaluating the impact of adopting SFAS 159 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
noncontrolling 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 by the
Company beginning in the first quarter of fiscal 2009. Although
the Company will continue to evaluate the application of
SFAS 141 R, we do not currently believe adoption will have
a material impact on our consolidated financial statements.
SFAS 160. In December 2007, the FASB
issued SFAS 160, Noncontrolling Interests in
Consolidated Financial Statements — an amendment of
ARB No. 51 (“SFAS 160”). This statement
establishes accounting and reporting standards for the
noncontrolling 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.
NOTE 3.
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
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
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 remediation liabilities,
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
environmental-related regulations, changes in future operational
plans and inherent imprecision associated with estimating
environmental matters far into the future.
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
2007
2006
2005
Honeywell International, Inc.
41%
38%
9%
U.S. Army Corps of Engineers
6%
10%
27%
The following customer had a receivable balance of more than 10%
of our total trade receivables as of December 31:
Percent of Receivables
Customer
2007
2006
Honeywell International, Inc.
50%
49%
Credit Risk Concentration. We maintain most of
our cash and short-term investments with Wells Fargo Bank.
Substantially all of the balances are uninsured and are not used
as collateral for other obligations. Short-term investments
consist of high-quality commercial paper currently with a
maximum maturity of approximately 30 days. Concentrations
of credit risk with respect to 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 International, Inc., for which
significant credit risk exists, although mitigated through 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 31,2007, the Paper, Allied-Industrial Chemical & Energy
Workers International Union, AFL-CIO, CLC (PACE), represents
10 employees at our Richland facility. Our 228 other
employees do not belong to a union.
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 $8.9 million,
$7.0 million and $5.7 million for the years ended
December 31, 2007, 2006 and 2005, 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 2007, 2006 and 2005 matching
contributions to the Plan of $267,000, $241,000 and $221,000,
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 environmental
assessments
and/or
remedial efforts are 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 monitoring 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,
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
2007. 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 31,2007 approximated 8.2%. We perform periodic reviews of both
non-operating and operating sites and revise the accruals as
necessary.
Changes to reported closure and post-closure obligations for the
years ended December 31, 2007 and 2006 were as follows:
2007
2006
$s in thousands
Beginning obligation
$
12,816
$
11,687
Accretion expense
1,064
1,074
Payments
(733
)
(1,148
)
Adjustments
1,987
1,203
Ending obligation
15,134
12,816
Less current portion
(803
)
(656
)
Long-term portion
$
14,331
$
12,160
The adjustment to the obligation is a change in the expected
timing of cash expenditures based upon actual and estimated cash
expenditures. 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 primary adjustments in 2006
were: (1) a $2.6 million increase to
the obligation as a result of increasing our expected inflation
rate to 2.6%, (2) a $1.3 million increase to the
obligation for the acceleration of expected closure costs on
active disposal cells resulting from higher amounts of waste
disposed of during the year, (3) an $816,000 increase to
the obligation as a result of increasing our estimated costs to
close active disposal cells and (4) a $3.5 million
decrease to the obligation resulting from state approved of
future disposal cells that extended the dates that site closure
and post-closure costs are expected to be paid.
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, 2007 and
2006 as follows:
2007
2006
$s in thousands
Net closure and post-closure asset, beginning of year
$
2,368
$
1,428
Additions or adjustments to closure and post-closure asset
1,913
1,106
Amortization of closure post-closure asset
(983
)
(166
)
Net closure and post-closure asset, end of year
$
3,298
$
2,368
NOTE 10.
DEBT
Revolving
Line of Credit
We have a line of credit with Wells Fargo Bank for
$15.0 million with a maturity date of June 15, 2008.
The line of credit is unsecured. 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 Prime Rate or the offshore
London Inter-Bank Offering Rate
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
(“LIBOR”) plus an applicable spread. At
December 31, 2007, the applicable interest rate on the line
of credit was 5.7%. The credit agreement contains certain
quarterly financial covenants, including a maximum leverage
ratio, a minimum current ratio, a maximum funded debt ratio, and
a minimum fixed-charge coverage ratio that we are required to
maintain. 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 an event of default
and the payment of the dividend will not result in an event of
default. We expect to enter into a new unsecured line-of-credit
agreement prior to the expiration of our existing line-of-credit
agreement in June 2008.
At December 31, 2007 and 2006, we had no amounts
outstanding on the revolving line of credit. 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.
At December 31, 2006, the availability under the line of
credit was $10 million with $5.0 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.
NOTE 11.
INCOME
TAXES
The components of the income tax expense were as follows:
2007
2006
2005
$s in thousands
Current:
U.S. Federal
$
8,310
$
345
$
331
State
1,088
885
410
9,398
1,230
741
Deferred:
U.S. Federal
2,864
8,444
8,291
State
60
305
644
2,924
8,749
8,935
$
12,322
$
9,979
$
9,676
The following table reconciles between the effective income tax
rate and the applicable statutory federal and state income tax
rate:
2007
2006
2005
Taxes computed at statutory rate
35.0%
34.0%
34.0%
State income taxes (net of federal) income tax benefit
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
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, 2007 and 2006 were as follows:
2007
2006
$s in thousands
Current deferred tax assets:
Environmental compliance and other site related costs
$
308
$
249
Accruals, allowances and other
359
262
Net operating loss carry forward
—
864
Alternative minimum tax credit
—
791
Total current deferred tax assets
$
667
$
2,166
Long-term deferred tax assets (liabilities):
Net operating loss carry forward
$
2,316
$
2,288
Environmental compliance and other site related costs
1,762
2,329
Accruals, allowances and other
71
64
Property and equipment
(2,458
)
(1,550
)
Total long-term deferred tax assets
1,691
3,131
Less: valuation allowance
(2,268
)
(2,283
)
Net long-term deferred tax (liabilities) assets
$
(577
)
$
848
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, 2007 and 2006, 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 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. This adoption did not have an impact on our
consolidated financial statements. As of January 1, 2007
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, 2007 and 2006 were not
material.
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 2003 through 2006. Additionally, we may be subject
to examinations by various state taxing jurisdictions for tax
years 2002 through 2006. We are currently not under examination
by the IRS or state taxing jurisdictions.
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
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
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, 2007, 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.
Until August 2005 we held a $6.5 million deferred site
development asset for our share of the monetary damages
specified in an August 2004 settlement agreement between the
Central Interstate Compact Commission (“CIC”) and the
State of Nebraska. In August 2005, the State of Nebraska paid
the CIC and the CIC paid us $11.8 million fully resolving
our claim. The gain on the settlement of $5.3 million is
included in Total other income on our Consolidated Statements of
Operations and in Net cash provided by operating activities on
our Consolidated Statements of Cash Flows for the year ended
December 31, 2005.
Operating
Leases
Lease agreements primarily cover rail cars and office space.
Future minimum lease payments on non-cancellable operating
leases as of December 31, 2007 were as follows:
$s in thousands
2008
$
2,561
2009
1,454
2010
398
2011
153
2012
63
Thereafter
163
$
4,792
Rental expense from continuing operations amounted to
$4.4 million, $2.5 million and $2.0 million
during 2007, 2006 and 2005, respectively.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
NOTE 13.
EQUITY
Stock
Options
We have two stock option plans, the 1992 Stock Option Plan for
Employees (“the 1992 Employee Plan”) and the
1992 Director Stock Option Plan (“the
1992 Director Plan”). 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:
2007
2006
2005
$s in thousands, except per share amounts
Outstanding at beginning of period
291,900
567,320
913,708
Granted
52,976
166,000
7,500
Exercised
(51,000
)
(421,420
)
(328,888
)
Cancelled or expired
(27,500
)
(20,000
)
(25,000
)
Outstanding at end of period
266,376
291,900
567,320
Weighted average exercise price of options:
Beginning of period
$
13.43
$
4.84
$
4.40
Granted
$
22.67
$
21.74
$
11.53
Exercised
$
6.44
$
4.75
$
3.81
Cancelled or expired
$
8.63
$
21.74
$
4.00
Outstanding at end of period
$
17.10
$
13.43
$
4.84
Exercisable at end of period
124,077
145,900
414,650
Available for future grant
—
42,976
188,976
Intrinsic value of option exercised
$
583
$
6,223
$
3,562
Aggregate intrinsic value of options outstanding
$
1,700
$
1,955
$
5,438
Aggregate intrinsic value of options exercisable
$
1,502
$
1,955
$
3,910
Outstanding options
Weighted
average
Exercisable options
remaining
Weighted
Weighted
contractual
average
average
Number of
life
exercise
Number of
exercise
Range of exercise prices
Shares
(in years)
price
Shares
price
$1.47
10,000
0.4
$
1.47
10,000
$
1.47
$2.13
10,000
1.4
$
2.13
10,000
$
2.13
$2.42 — $3.50
10,200
3.4
$
2.44
10,200
$
2.44
$3.75 — $3.92
22,200
3.1
$
3.81
22,200
$
3.81
$9.20 — $12.15
25,000
6.6
$
10.09
25,000
$
10.09
$20.27 — $21.74
150,000
8.7
$
21.62
46,677
$
21.71
$23.48
38,976
9.9
$
23.48
—
$
—
Effective January 1, 2006, we adopted the provisions of
SFAS 123 R for our share-based compensation plans. We
previously accounted for these plans under the recognition and
measurement principals of APB No. 25 and related
interpretations and disclosure requirements established by
SFAS 123, as amended by SFAS 148. Under APB
No. 25, no compensation expense was recorded in earnings
for option awards granted under our stock-based award
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
plans. The pro forma effects on net income and earnings per
share for stock-based awards were instead disclosed in a
footnote to the financial statements. 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.
During 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, 2007 and 2006 were as follows:
2007
2006
Stock-based compensation recorded in selling, general and
administrative expense
$
370,335
$
222,092
Stock-based compensation recorded in other direct costs
5,087
4,935
Total stock-based compensation expense
$
375,422
$
227,027
The following table illustrates the pro forma effect on net
income and earnings per share by applying the fair value
recognition provisions of SFAS 123 R to stock-based awards
for the year ended December 31, 2005.
2005
$s in thousands,
except per share amounts
Net income
$
15,438
Deduct: Stock-based employee compensation expense determined
under fair-value-based method for all awards, net of related tax
effects
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
The fair value of each option grant is estimated using the
Black-Scholes option-pricing model with the following
weighted-average assumptions:
2007
2006
2005
Expected life
3.2 years
3.5 years
10 years
Expected volatility
40%
52%
50%
Risk-free interest rate
3.5%
5.0%
4.1%
Expected dividend yield
3.0%
3.1%
2.7%
Weighted-average fair value of options granted during the period
$
5.81
$
7.63
$
5.28
Restricted
Stock Plans
We have two restricted stock plans: the 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 share of restricted stock with a value
equal to $25,000 on the date of grant 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, 2007, 26,100 shares
of restricted stock were issued to the non-employee directors
and 173,900 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 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, 2007, 19,800 shares of restricted stock
were issued to the employees and 180,200 shares of stock
remained available for issuance.
The table below summarizes restricted stock activity and related
expense for the years ended December 31, 2007 and 2006.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
NOTE 14.
CALCULATION
OF EARNINGS PER SHARE
2007
2006
2005
Basic
Diluted
Basic
Diluted
Basic
Diluted
$s and shares in thousands, except per share amounts
Net income
$
19,396
$
19,396
$
15,889
$
15,889
$
15,438
$
15,438
Weighted average common shares outstanding
18,217
18,217
18,071
18,071
17,570
17,570
Dilutive effect of stock options and restricted stock
40
131
380
Weighted average shares outstanding
18,257
18,202
17,950
Earnings per share
$
1.06
$
1.06
$
0.88
$
0.87
$
0.88
$
0.86
Anti-dilutive shares excluded from calculation
166
151
—
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.
In June 2005, we entered into a contract with Honeywell
International, Inc. to transport, treat, and dispose of a
presently estimated 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.
In October 2005, Honeywell stopped shipments and also filed a
motion in U.S. District Court, District of New Jersey to
reduce the amount of material removed from the site. This motion
was unsuccessful and Honeywell shipments resumed in April 2006.
Deficiency payments were made to the Company for the period of
interruption pursuant to the contract.
Weighted average common shares outstanding used in the diluted
earnings per share calculation
18,051
18,257
18,237
18,226
18,202
(1)
Operating income includes income from a business interruption
insurance claim of $704,000 in the three months ended
September 30, 2006.
(2)
Basic and 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
basic and diluted earnings per common share amounts.
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 December 31, 2007. 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, 2007, 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, 2007, as stated in
their report, which is included in Part II, Item 8 of
this Annual Report on
Form 10-K.
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 2008 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, 2007. 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 grants 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 on
Form 8-K
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.
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. Information
with respect to equity compensation plans is set forth under the
heading “Equity Compensation Plan Information” in this
Annual Report on
Form 10-K
under Item 5 of Part II. The information contained
under these headings is incorporated herein by reference.
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.
(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 36
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 36.
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 27, 2008.
