Here's Why US Ecology Soared on First-Quarter 2017 Earnings Last Week

By Maxx Chatsko Markets Fool.com

Shares of US Ecology (NASDAQ: ECOL), one of North America's leading environmental services providers, rose sharply last week following the release of first-quarter 2017 earnings. While revenue, gross profit, and EPS all declined from the year-ago period, investors were willing to acknowledge that the solid performance achieved in Q1 2016 was a bit of an outlier. More importantly, investors appear to broadly agree that the company is firmly on the right long-term path.

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That much was confirmed in part by management sticking to its previous full-year 2017 financial guidance, confidence in which have been bolstered by strong indicators of industrial growth. The guidance calls for significant growth compared to what was achieved in 2016, even with a slow start to this year. With that in mind, here's what you need to know about US Ecology's Q1 2017 earnings.

Image source: Getty Images.

By the numbers

Here are the headline numbers from the release:

Metric

First Quarter 2017

First Quarter 2016

Change

Environmental services revenue

$81.3 million

$81.5 million

(0.2%)

Field & industrial services revenue

$28.9 million

$31.8 million

(9.2%)

Total revenue

$110.2 million

$113.3 million

(2.8%)

Total gross margin

28.9%

31.1%

220 basis points

Net income

$5.2 million

$7.5 million

(30.7%)

Diluted EPS

$0.24

$0.35

(31.4%)

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Data source: US Ecology

Environmental services revenue saw the largest year-over-year increases from the general manufacturing and refining industries, while revenue generated from chemical manufacturing customers witnessed the largest decline. Base business (long-term and recurring contracts) grew 3% compared to Q1 2016, while event business (one-time and cycling contracts) slipped 9% following the completion of a major nuclear fuel fabrication cleanup. Field & industrial services revenue was mostly impacted by a large contract that was not renewed.

Aside from the day-to-day performance of operations, the most significant event impacting US Ecology's long-term performance was a new debt refinancing agreement finalized in April. As most investors who follow the company are well aware, its giant acquisition of EQ several years ago was only possible via a large bolus of debt financing. That was a necessary evil in order to boost its long-term growth prospects, and management has prioritized paying down debt balances in each quarter since the transaction.

The new debt refinancing deal included the following highlights:

  • A $500 million, five-year, senior revolving credit facility that replaced the former credit facility.
  • A lower interest rate will save the company approximately $15 million in cash interest expenses over the next five years.
  • The total interest savings from the new credit facility will boost diluted EPS by approximately $0.08 in 2017.

The annual cash interest savings alone are nearly equivalent to the company's annual dividend. That's not to say that an increased dividend is on the way any time soon, but it demonstrates the increased financial flexibility provided by the refinancing.

Outlook

Management reaffirmed the previously issued full 2017 guidance, as follows:

Metric

2017 Guidance

2016 Actual

Forecast Change

Net income

$36.9 million to $42 million

$34.2 million

7.9% to 22.8%

Diluted EPS

$1.69 to $1.93

$1.57

7.6% to 22.9%

Adjusted EBITDA

$120 million-$130 million

$112.8 million

6.3% to 15.2%

Data source: US Ecology

Interestingly, the company didn't budge from its previously issued diluted EPS range, despite being impacted $0.07 per share by the new debt refinancing agreement. Here's how the math works out: The refinancing will incur a non-cash impairment charge in the second quarter of this year totaling $0.15 per share, which will be partially offset by full-year interest savings equivalent to $0.08 per share. Either way, US Ecology is guiding for a strong 2017.

Long story short

US Ecology has never been a flashy business, and the performance in Q1 shows that won't change any time soon. However, the company has made good on its promise to incorporate and leverage the new growth opportunities provided by its EQ acquisition. And if operations this year meet its ambitious financial guidance, long-term investors will reap the rewards for their patience.

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Maxx Chatsko has no position in any stocks mentioned. The Motley Fool recommends U.S. Ecology. The Motley Fool has a disclosure policy.