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Strong 3Q for US Ecology, Ups View

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US Ecology, Inc. (ECOL - Free Report) reported adjusted earnings per share (EPS) of 44 cents (excluding special items) in third quarter 2012, up 33% year over year and way ahead of the Zacks Consensus Estimate of 28 cents.
Including non-cash gains on foreign currency translation and business development costs, EPS in the reported quarter came in at 47 cents. Including non-cash foreign currency translation loss and business development costs, EPS in the prior-year quarter stood at 20 cents.
Quarter in Detail
Revenues increased 15% to $45.7 million in the quarter and outpaced the Zacks Consensus Estimate of $40 million.  Treatment and disposal revenue improved 12%. The acquisition of US Ecology Michigan contributed $2.9 million of total revenue in the quarter. Excluding the acquisition, Treatment and disposal revenue reflected a 22% spike in Base Business (recurring waste streams) revenue, offset by a 9% year over year decline in Event business (discrete projects). Transportation revenue surged 40%.
Total volume disposed or processed during the quarter at US Ecology’s Idaho, Michigan, Nevada, Texas and Quebec waste facilities was 266,000 tons, down 7% from the year-ago quarter. The decline mainly reflects shipments from the GE Hudson River clean-up project in the third quarter last year. Excluding the 2011 Hudson River project waste volume and the contribution from US Ecology Michigan, volumes increased 17% in the quarter from the year-ago quarter. Average selling price increased 21% for the reported quarter.
Direct operating costs increased 6% to $19.9 million while transportation costs upped 31% to $7.2 million in the quarter. Gross profit improved 21% to $18.6 million with gross margin at 41% compared with $15.3 million and 39%, respectively, in the prior-year quarter.  Treatment and disposal gross margin improved to 48% from 46% a year ago due to favorable service mix.
Selling, general and administrative expenses increased 8% year over year to $6.2 million due to higher business development costs, payroll related costs including variable incentive compensation and other general administrative costs associated with higher levels of business activity.
The company’s operating profit improved 29% year over year to a record $12.4 million. Operating margin expanded 290 basis points to 27.1% from 24.2% in the year-ago quarter. Adjusted EBITDA (earnings before Interest, tax, depreciation and amortization) was also a record $16.7 million, up 19% from the prior-year quarter.  
Cash and cash equivalents were $5.5 million as of September 30, 2012, down from $5.9 million as of June 30, 2012. During the first nine months of fiscal 2012, cash flow from operations decreased to $24.8 million from $32 million in the comparable year-ago period.
Total borrowings on line of credit were $49.5 million as of September 30, 2012 compared with $50 million as of June 30, 2012. As of September 30, 2012, $24.8 million remain available for future borrowings.
US Ecology expects 2012 EPS between $1.30 and $1.35, up from the previous expectation of $1.05 to $1.15, reflecting upbeat third quarter results and expectations of a stronger fourth quarter. Adjusted EBITDA is now expected to lie between $55 and $57 million, up from $48 and $52 million.
Our Take
US Ecology posted a strong third quarter with record treatment and disposal revenue, operating income and adjusted EBITDA thanks to continued growth in its Base Business.  We expect the momentum in the Base Business to continue in the fourth quarter as well. In addition, a healthy pipeline in the Event Business point toward a strong fourth quarter. Furthermore, with several higher margin niche projects under contract and slated for 2013 in the Events Business, the year 2013 also holds significant promise.
Boise, Idaho-based US Ecology through its subsidiaries, provides radioactive, hazardous, and non-hazardous industrial waste management and recycling services to commercial and government entities, which include refineries and chemical production facilities, manufacturers, electric utilities, steel mills, medical and academic institutions and waste brokers. US Ecology currently maintains a Zacks #1 Rank (Strong Buy) for the short term.
Peer Comparison
It competes with Clean Harbors, Inc. (CLH - Free Report) and Waste Management Inc (WM - Free Report) . Waste Management reported adjusted EPS of 61 cents in the third quarter of 2012, down 3% from the year-ago quarter but a penny ahead of the Zacks Consensus Estimate. The year-over-year fall was due to a decline in recycling commodity prices in the quarter. Clean Harbors is yet to announce its third quarter results. The Zacks Consensus Estimate for the company currently stands at 55 cents, projecting a 21% year over year decline.

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