US Ecology: Solid Second Quarter Results and a Surprise Sale

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Environmental services leader US Ecology (ECOL) turned in a solid second quarter 2015 earnings report with significant growth from the year-ago period. Both segments -- environmental services and field and industrial services -- contributed to the improving performance for the company. Additionally, the company decided to sell an industrial business acquired as part of the EQ Holdings deal in 2014 to a group of private investors for $58 million. The proceeds will be used to pay down debt taken on to make the acquisition.

Mr. Market found a lot to like in the earnings results and has sent shares higher today. Here's what investors need to know.

By the numbers
You can check the press release for more detailed (but unaudited) results, but here are the important financial metrics to consider.

Source: US Ecology press release

There are some really big swings in the table above due to the timing of the EQ acquisition last year. Remember, EQ only contributed to 13 days of results in the second quarter 2014. The good news is that, beginning with third quarter 2015 results, the year-over-year comparisons will be easier to digest and analyze since investors won't need pro forma results.

It's important to discuss the implications of the EQ acquisition for the most recent quarter. Gross margin receded 830 basis points compared to the same period last year because the field and industrial services segment generates much lower margin revenue than environmental services. The former grew significantly after the EQ acquisition, which also explains the massive jump in the segment's year-over-year revenue.

Meanwhile, US Ecology delivered much lower EPS in the second quarter 2015 than last year thanks almost entirely to an increase in interest expense, which is paid on the debt that was taken on to acquire EQ in the first place. The good news is that the debt pile will be significantly lower at the end of the year after a strategic divestiture closes.

Allstate Power Vac divestiture
One of the businesses acquired under the EQ name was Allstate Power Vac, an industrial cleaning and maintenance business operating in the Northeast. While the business contributed 11% of US Ecology's revenue in the first half of 2015, it only accounted for 3% of the company's adjusted EBITDA in the same period. In addition to being a low-margin business, from a geographical standpoint, some of its components simply weren't very close to the company's core environmental services operations that generate the highest margin revenue.

Remember, feeding business from the industrial services segment to the environmental services segment was a major factor in management's decision to acquire EQ. Most of Allstate Power Vac's business simply didn't make the cut, although US Ecology was able to retain certain parts of the business that will complement environmental services.

Investors should be happy not only about the strategic move to divest Allstate Power Vac but also the fact that management intends to use the gross proceeds of approximately $58 million to pay down debt. The deal, which is expected to close in the fourth quarter of 2015, will result in a little less than $58 million in net proceeds after certain considerations, but it's still significant.

Consider that $58 million represents 16% of US Ecology's long-term debt as of the end of June and 12.5% of the total acquisition cost of EQ last year. Using the proceeds to pay down debt will result in lower interest expenses in 2016, which will have a beneficial effect on EPS, although 2015 EPS will be slightly lower as a result of the sale (existing operations are expected to achieve the original guidance).

What does it mean for investors?
Investors have to be pleased about the near-term and long-term opportunities for US Ecology. Management continues to execute on growth plans, prioritize responsible use of capital, and position the company as a leader in its industry. Annual guidance for 2015 was reaffirmed (with minor adjustments to account for the Allstate divestiture), and there don't appear to be many significant hurdles for long-term investors to worry about. Look forward to gauging growth in the third quarter.