US Ecology Pares Back Guidance After Posting Weaker Earnings Than It Expected

US Ecology (ECOL) reported its third-quarter 2016 results after the market closed on Thursday. Continued weakness in the industrial macroeconomic climate had the environmental-services company posting weaker results than it anticipated and lowering its full-year 2016 guidance.

The market reaction was relatively muted, with shares closing down 1.1% on Friday.

Image source: US Ecology.

US Ecology's key quarterly numbers

Data source: US Ecology. 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.

Wall Street was looking for adjusted earnings of $0.56 per share on revenue of $148.41 million. So US Ecology fell short on both numbers. Of course, investors shouldn't give too much credence to analysts' estimates, as Wall Street is focused on the short term. However, they can be helpful to keep in mind, because together with forward guidance, they often help explain market reactions.

Key base business: 4% year-over-year revenue growth

Revenue in US Ecology's key base business increased 4% from the year-ago period, which management stated was in line with its expectations. 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.

This quarter's uptick is a positive, since last quarter the base business revenue was flat with the year-ago period after rebounding 3% year over year in the fourth quarter of 2015 and 7% the first quarter of this year.

Segment performance

US Ecology's environmental-services segment continues to face challenges because of delays in the event business and fewer remedial cleanup opportunities. Segment revenue was $87.8 million in the quarter, down 4.5% from $91.9 million in the second quarter of 2015. This decrease consisted of a 4% decline in treatment and disposal revenue and a 9% decline in transportation revenue. Gross profit was $33.6 million, a 5.6% decline from $35.6 million in the year-ago period.

The field and industrial services segment, which has been the better performing of the two segments, grew pro forma (excluding Allstate) revenue and gross profit on a year-over-year basis, but it didn't perform as well as the company anticipated. It generated $37.0 million in revenue, down from $56.5 million in the year-ago period. However, excluding Allstate, which contributed $20.1 million of revenue in the year-ago period, revenue increased 1.6%. Gross profit was $5.7 million. Excluding Allstate, which contributed $4.9 million of gross profit in the year-ago period, gross profit rose about 4%.

What management had to say

Said CEO Jeff Feeler:

Continued sluggishness in the macro industrial environment resulted in our third quarter not materializing as expected. Recurring base business delivered solid 4% growth for our environmental services segment during the quarter and was in line with expectations. However, we continued to experience challenging market dynamics in our event business resulting from a combination of project delays and fewer remedial cleanup opportunities. Our field and industrial services business unit saw solid growth on a year-over-year basis but also delivered lower-than-anticipated results on softer business activity levels.

Looking ahead

Feeler noted that the company doesn't expect any improvements in the market environment through the end of the year, and it was lowering its full-year 2016 guidance because of a combination of factors:

Despite generating single-digit growth in our base business, project deferrals continue to push volume to future periods. Additionally, as we exit the summer construction season, it is unlikely we will see improvement in our event business, with customers more likely to wait until 2017 to start new projects. Our field and industrial services business is expected to slow in the fourth quarter as a result of lower industrial spending and the expiration of a contract that was not renewed. 

Data source: US Ecology.