US Ecology Q2 Earnings: Field and Industrial Services a Bright Spot

By Markets Fool.com

US Ecology(NASDAQ: ECOL)reported its second-quarter 2016 results after the market closed on Thursday. The field and industrial services segment was a bright spot, and the base business of the environmental services segment performed as expected, while project delays in the events business of the latter segment caused the company to temper its full-year 2016 guidance.

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Operating results fell short of the company's expectations, while adjusted earnings per share missed Wall Street's estimates.

Image source: US Ecology.

US Ecology's key quarterly numbers

Metric

Q2 2016

Q2 2015

Growth (YOY)

Revenue

$122.4 million

$139.73 million

(12.4%)

Revenue excluding Allstate Power Vac*

$122.4 million

$122.8 million

(0.3%)

Adjusted EBITDA

$27.7 million

$31.4 million

(11.8%)

Pro forma adjusted EBITDA (excludes Allstate)

$28.1 million

$30.5 million

(7.9%)

Operating income

$17.1 million

$12.1 million

41.3%

Pro forma operating income (excludes Allstate)

$17.1 million

$18.9 million

(9.5%)

GAAP earnings per share

$0.41

$0.10

310%

Adjusted EPS

$0.37

$0.41

(9.8%)

EBITDA = earnings before interest, taxes, depreciation, and amortization. GAAP = generally accepted accounting principles. YOY = year over year. *Allstate Power Vac was sold on Nov. 1, 2015. Data source: US Ecology.

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Wall Street was looking for adjusted earnings of $0.41 per share on revenue of $122.16 million. So, EPS fell $0.04 short, while revenue came in on target. Long-term investors shouldn't place too much emphasis on analysts' estimates since Wall Street focuses on the short term. However, estimates can be worth knowing since they often help explain market reactions.

Key base business: Revenue flat

Revenue in US Ecology's key base business was flat with the year-ago period, which management stated was in line with its expectations. Base business revenue was driven by growth in the refining, general manufacturing, and utility verticals. (The base business, part of the company's environmental services segment, doesn't include its "event business," defined as non-recurring projects of 1,000 tons or more.)

Base business revenue rebounded the last two quarters, rising 3% in Q4 2015 and 7% in Q1 2016 on a year-over-year basis. The stalling of growth in Q2 could be a fluke since quarterly results will vary or it could indicate that the challenging industrial macroeconomic environment that US Ecology faced last year is somewhat more protracted than last quarter's results suggested. Next quarter's results should illuminate which of these scenarios is at play.

Segment performance

US Ecology's environmental services (ES) segment continues to face challenges due to delays in the event business, which experienced a 32% drop in revenue from the year-ago period.Segment revenue was $82.8 million in the quarter, down 4.8% from $87 million in the second quarter of 2015. This decline consisted of a 7% decrease in treatment and disposal revenue, partially offset by a 4% increase in transportation revenue. Gross profit was $30.6 million, a decline of 6.1% from $32.6 million in the year-ago period.

The field and industrial services (FIS) segment continues to perform well. It generated $39.6 million in revenue, down from $52.7 million in the year-ago period. However, excluding Allstate, which contributed $16.9 million of revenue in the year-ago period, revenue increased 10.6%. Gross profit was $8.9 million. Excluding Allstate, which contributed $3.3 million of gross profit in the year-ago period, gross profit rose more than 11%.

Acquisitions and divestitures

As part of US Ecology's focus on its core business, it divested itsnonhazardous waste facility in Augusta, Georgia, on April 5. On May 2, it acquired Environmental Services, Inc., a Canadian treatment, storage, and disposal facility (TSDF) that opens up opportunities to its Michigan-based assets.

Looking ahead: Tempered 2016 guidance

US Ecology continues to expect its base business to grow in the low single digits, consistent with the first half of the year; however, it lowered its expectations for its event business due to an increased frequency of project delays experienced over the past year. Thus, the company now expects results for 2016 to come in at the low end of its previously issued guidance.

Said CEO Jeff Feeler:

We are excited about a number of key event projects now kicking off that were expected to ship this past quarter[;] however, one of our larger, multi-year projects has recently increased in scope and complexity, resulting in a regulatory review [that] may push some of the shipments into next year.

Based on this increased uncertainty related to timing, we are tempering our view on the Event Business, resulting in updated guidance at the low end of our previously issued guidance range of $1.80 to $1.95 per diluted share of earnings and $126 million to $132 million of Adjusted EBITDA. We expect that any timing based adjustments to our 2016 guidance will benefit our 2017 results.

As Feeler's comments indicate, the tempering of 2016 guidance is due to a timing issue in the event business -- not lost business. Delays from 2016 will boost US Ecology's 2017 results.

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Beth McKenna 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.