5 Things US Ecology Management Wants You to Know

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Image source: Wisconsin Department of Natural Resources/Flickr.

It may not be glamorous work, but moving, processing, and disposing of hazardous wastes is important work. It's also mandated by the federal government, which creates a necessary and guaranteed opportunity for companies willing to invest in specialized equipment, training a workforce, and permitted landfills. The competition is fierce and the industry is relatively fragmented, but only a few companies can call themselves leaders.

One of the big boys of environmental services, US Ecology , released first-quarter 2015 earnings last week and had some interesting revelations for investors. How did the company do in its first first quarter after the massive acquisition of its peer, The Environmental Quality Company, or EQ? Here are five things US Ecology management wants you to know.

US Ecology is making EQ operations more valuable
Investors and analysts discussed what EQ would bring to the table for US Ecology -- for instance, balancing high-margin, but lumpy, revenue from disposal business with lower-margin, but frequent and recurring, services business. Or expanding the company's operations from coast-to-coast. Or simply growing the top and bottom lines with simple addition.

But few discussed what US Ecology would bring to the table for EQ: quite a bit of value. Legacy business at EQ grew handsomely over pre-ownership periods, with adjusted EBITDA leaping 84% in the year-over-year first-quarter comparison and dilution being cut in half in the same comparison period. President and CEO Jeff Feeler explained:

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The legacy EQ business saw tremendous improvement over the pre-ownership first quarter 2014 with pro forma adjusted EBITDA growth of 84%. On a per-share basis, legacy EQ improved to a loss of just $0.06 per diluted share in the seasonally weak first quarter. This compares to a pro forma loss of $0.12 per share in the pre-ownership period of first quarter last year.

It's all part of the same synergy that investors were hoping would be delivered, but from a different perspective.

Value from refinery customers is being maximized
Falling petroleum prices? What falling petroleum prices? Legacy US Ecology operations grew treatment and disposal revenue from refinery customers 47% compared with the first quarter of 2014. Part of the increase was enabled by the installment of larger dryers, used in thermal recycling activities, which were available since the beginning of the year and drove higher volumes. Doubly important, the growth allowed the company to diversify its revenue sources and spread risk across multiple customers.

Image source: US Ecology.

Will it be enough? Private cleanup revenue dropped 26% compared with last year thanks to lower volumes from a nuclear fuel fabrication decommissioning project and a major cleanup project that occurred in early 2014. Meanwhile, government volumes accounted for nearly half of the company's revenue in the first quarter, thanks to a 100% increase compared to the first quarter of 2014 driven by major business from the U.S. Army Corp of Engineers, but the risk of over dependency shouldn't be a major concern for investors. US Ecology should be able to continue growing its way to diversified revenue.

Paying down debt is a top priority
US Ecology didn't have a penny of debt before the EQ acquisition last summer, but it took on about $414 million in debt to close the deal. So it's no surprise that debt has suddenly become an important financial metric for investors.

When an analyst asked whether strategic acquisitions or debt repayment was a higher priority, Feeler gave the standard management response by stating that if opportunities to acquire assets arose, US Ecology would be "in the game." He also reminded the analyst that integrating EQ's operations was the primary focus in the near term and then offered the following insight into how management is prioritizing capital deployment:

"Internal capitalization to drive organic growth is the top priority. Debt -- pay down when we don't have acquisition opportunities or organic growth opportunities from a capital perspective, we'll do that."

Actions speak louder than words -- and they were pretty loud in the first quarter of 2015. US Ecology generated $22.6 million in cash from operations and paid $22 million in long-term debt. It had to draw down its cash reserves to swing an additional $9.2 million in capital expenditures and $3.9 million in dividend payments -- a practice that is obviously unsustainable -- but cash generation is expected to pick up in warmer months. Hopefully it balances out in the next two quarters of the year and debt repayments continue.

More weight given to this risk factor: weather
Weather can always sneak up and affect a company's operations in unexpected ways, but it will be more of a factor now that US Ecology has expanded its footprint into the Rust Belt and Eastern United States with the acquisition of EQ. In other words, cold winters make year-over-year comparisons a bit choppier than before. Luckily, increased volumes in the East Coast, driven by government business, lessened any potential negative impact from unseasonably cold and unusually wet weather this past winter. Feeler made investors aware of the heightened risk factor nonetheless:

"Despite the significant adverse weather conditions impacting the East Coast, both our environmental services and field and industrial services segments posted strong quarterly revenues of $91.4 million and $45.2 million, respectively. The environmental services business was surprisingly strong in the East, benefiting from solid event business volumes."

Should the possibility of bad weather be a game-changer or a deal-breaker for investors? Certainly not, especially after considering that the year-round benefits of the EQ acquisition far outweigh the negative consequences. But it's good to remind yourself that East Coast operations (which experience all four seasons, unlike West Coast operations) may come with varying levels of volatility in the first and fourth quarters of each year.

Original financial guidance for 2015 remains intact.
It can be difficult to track the multiple comparisons between annual periods, especially with talk of pre-ownership and pro forma and legacy business metrics. The important thing for investors to know is that total operations are humming along, growth is being captured, long-term debt is being reduced, and the original financial guidance for the year remains intact. As Feeler noted:

Business conditions remain strong, and we are seeing continued opportunities emerge for the summer time cleanup season. Many projects have already been secured, and we are actively bidding on others. As a result, we are reaffirming our previously issued 2015 guidance, with adjusted EBITDA ranging from $137 million to $143 million and earnings per share ranging from $1.76 to $1.92 per share.

It appears that the big, hairy acquisition of EQ is paying off for investors. We'll have to check back next quarter to see whether the company can execute on its goals of attracting more business in the busier summer months.

The article 5 Things US Ecology Management Wants You to Know originally appeared on Fool.com.

Maxx Chatsko has no position in any stocks mentioned. The Motley Fool recommends U.S. Ecology. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.