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NRC Group Reports Second Quarter 2019 Financial Results

HOUSTON--(BUSINESS WIRE)--

NRC Group Holdings Corp. (NYSE American: NRCG) (“NRCG” or the “Company”), a global provider of a wide range of environmental, compliance and waste management services, today reported financial results for the second quarter ended June 30, 2019.

Second Quarter 2019 Financial Results

Operating revenue in the second quarter of 2019 increased 49% to $121.8 million compared to $81.7 million in the prior year period. The increase was largely driven by increased emergency response activity in connection with an event in the Gulf Coast region, acquisitions completed in 2018 and 2019 and increased remediation activity. Excluding the impact of acquisitions, as well as the increased emergency response activity in the Gulf Coast region, organic operating revenue growth was 9% compared to the prior year period.

Operating expenses, which include cost of revenue (exclusive of depreciation and amortization), in the second quarter of 2019 were $83.7 million compared to $54.5 million in the prior year period. The increase was primarily due to incremental expenses related to increased emergency response activity and acquisitions completed in 2018 and 2019.

General and administrative expenses in the second quarter of 2019 were $17.2 million compared to $12.7 million in the prior year period. Approximately $1.8 million of this increase was related to the acquisitions completed in 2018 and 2019, with the remaining increase primarily due to increased public company costs and an increase in the Sprint segment to support waste disposal growth.

Net loss in the second quarter of 2019 was $10.1 million, or $(0.27) per share1, compared to a net loss of $0.2 million, or $(0.01) per share1, in the prior year period. The increase in net loss was largely due to the previously disclosed $10.0 million payment of common stock made to NRCG’s majority stockholder upon consummation of the acquisition by NRCG of Organic Incineration Technology, Inc., which closed in the second quarter of 2019, transaction expenses related to the proposed merger with US Ecology, Inc. (“US Ecology”), and the change in fair value of contingent consideration related to several acquisitions.

Adjusted EBITDA2, a non-GAAP financial measure that is calculated consistent with the Company’s senior credit facility, in the second quarter of 2019 increased 28% to $23.3 million compared to $18.3 million in the prior year period.

Segment Results

Domestic Standby Services – Domestic Standby Services operating revenue in the second quarter of 2019 increased 6% to $9.7 million compared to $9.1 million in the prior year period. The increase was primarily due to an increase in equipment leasing and emergency response activity. Operating profit in the second quarter of 2019 was $3.5 million compared to $3.8 million in the prior year period. The slight decline was due to lower tolling revenue and higher emergency response activity (project mix).

Domestic Environmental Services – Domestic Environmental Services operating revenue in the second quarter of 2019 increased 69% to $82.1 million compared to $48.6 million in the prior year period. The increase was largely due to increased emergency response activity in connection with an event in the Gulf Coast region and increased remediation activity, partially offset by a decline in Alaska and New England. Operating profit in the second quarter of 2019 increased 173% to $12.1 million compared to $4.4 million in the prior year period. The increase was largely due to increased emergency response activity in the Gulf Coast region.

International Services – International Services operating revenue in the second quarter of 2019 increased 65% to $9.3 million compared to $5.7 million in the prior year period. The increase was primarily due to increased remediation activity in Turkey and growth in Clean Line Waste Water Solutions Limited (“Clean Line”), which was acquired in March 2018. Operating profit in the second quarter of 2019 increased 80% to $1.7 million compared to $0.9 million in the prior year period. The increase was due to the contribution of increased remediation activity and growth in Clean Line.

Sprint – Sprint operating revenue in the second quarter of 2019 increased 13% to $20.8 million compared to $18.4 million in the prior year period. The increase was primarily due to the acquisition of Quail Run Services, LLC (“Quail Run”) in October 2018, partially offset by lower rig counts in the Eagle Ford Basin which impacted waste disposal revenue. Operating profit in the second quarter of 2019 increased 2% to $7.7 million compared to $7.6 million in the prior year period. The increase was largely due to the benefit from the Quail Run acquisition.

Balance Sheet and Cash Flow

At June 30, 2019, the Company had $22.6 million in cash and equivalents and $384.4 million of total debt (gross of issuance fees) compared to $18.4 million in cash and equivalents and $352.2 million of total debt (gross of issuance fees) at December 31, 2018.

Free cash flow conversion2, defined as Adjusted EBITDA less total capital expenditures (excluding one-time waste disposal investments) divided by Adjusted EBITDA, for the second quarter of 2019 was 80% compared to 86% in the prior year period. Free cash flow conversion2 for the six months ended June 30, 2019 was 84% compared to 80% in the prior year period.

__________________________
1
Excludes dividends from 7.00% Series A Convertible Cumulative Preferred Stock.
2 Adjusted EBITDA and Free cash flow conversion are non-GAAP financial measures. See below under the headings “Use of Non-GAAP Financial Information” and “Reconciliation of Non-GAAP Financial Measures” in the tables that follow for a description of the Company’s use of Non-GAAP financial information in this release and a reconciliation of such non-GAAP financial measures to GAAP.

Proposed Merger with US Ecology, Inc.

As previously announced, NRCG has entered into a definitive merger agreement with US Ecology (ECOL) pursuant to which US Ecology will form a new holding company that immediately upon the closing of the transaction will own both US Ecology and NRCG. The merger is expected to close in the fourth quarter of 2019. Until the closing, NRCG will continue to operate as an independent company.

Conference Call

Management will not be holding a conference call to review results nor providing any forward guidance due to the previously announced proposed merger with US Ecology.

About NRCG

NRCG is a global provider of a wide range of environmental, compliance and waste management services. NRCG’s broad range of capabilities and global reach enable it to meet the critical, and often non-discretionary, needs of more than 5,000 customers across diverse end markets to ensure compliance with environmental, health and safety laws and regulations around the world. NRC Group, a wholly owned subsidiary of NRCG, was established in June 2018 through the combination of two businesses, National Response Corporation and Sprint Energy Services, both previously operating separately under the ownership of investment affiliates of J.F. Lehman & Company. For more information, please visit www.nrcg.com. No portion of the website referenced in this paragraph is incorporated by reference into or otherwise deemed to be a part of this news release.

Use of Non-GAAP Financial Information

This release describes historical financial information that includes “Adjusted EBITDA,” and “Free cash flow conversion,” both of which are financial measures that are not calculated in accordance with GAAP and provided only as supplemental information. The Company has presented Adjusted EBITDA because it is substantially the same as the metric called “Consolidated Adjusted EBITDA,” as defined in the Company’s senior credit facility, which is a key component in the determination of its leverage ratios (including its ability to service debt and incur capital expenditures). The Company believes its presentation of Adjusted EBITDA is useful because it provides investors and industry analysts the same information that it uses internally for purposes of assessing its liquidity and core operating performance. The Company provides Free cash flow conversion because it is a useful measure to investors as to the ongoing liquidity of the business after required capital expenditure investments. Adjusted EBITDA and Free cash flow conversion are each a non-GAAP financial measure and should not be considered as an alternative to financial measures prepared in accordance with GAAP such as operating income or net income as measures of operating performance or cash flows or as measures of liquidity. Adjusted EBITDA and Free cash flow conversion are not necessarily calculated the same way as other companies and should not be considered a substitute for or more meaningful than GAAP results, and should be read in conjunction with the GAAP financial information provided in this release.

For a further description of Adjusted EBITDA and Free cash flow conversion and explanation of the Company’s use thereof, please see “Reconciliation of Non-GAAP Financial Measure” in the tables that follow.

Forward-Looking Statements

Statements in this communication that are not historical facts are forward-looking statements that reflect NRCG’s management’s current expectations, assumptions and estimates of future performance and economic conditions. These forward-looking statements relate to, among other things, the anticipated closing of the proposed transaction and structure of the combined company. All statements other than historical facts may be forward-looking statements; words such as “anticipate,” “believe,” “could,” “design,” “estimate,” “expect,” “forecast,” “goal,” “guidance,” “imply,” “intend,” “may,” “objective,” “opportunity,” “outlook,” “plan,” “position,” “potential,” “predict,” “project,” “prospective,” “pursue,” “seek,” “should,” “strategy,” “target,” “would,” “will” or other similar expressions that convey the uncertainty of future events or outcomes are used to identify forward-looking statements. Such forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties and other factors, some of which are beyond the control of NRCG. Factors that could cause NRCG’s actual results to differ materially from those implied in the forward-looking statements include: (1) the risk that the conditions to the closing of the proposed merger with US Ecology are not satisfied, including the risk that required approvals for the transaction from governmental authorities or the stockholders of NRCG or US Ecology are not obtained; (2) the occurrence of any event, change or other circumstances that either could give rise to the right of one or both of NRCG or US Ecology to terminate the merger agreement, (3) litigation relating to the transaction; (4) uncertainties as to the timing of the consummation of the transaction and the ability of each party to consummate the transaction; (5) risks related to disruption of management time from ongoing business operations due to the proposed transaction; (6) unexpected costs, charges or expenses resulting from the transaction (7) the ability of NRCG and US Ecology to retain and hire key personnel; (8) competitive responses to the proposed transaction and the impact of competitive services; (9) certain restrictions during the pendency of the mergers that may impact NRCG’s or US Ecology’s ability to pursue certain business opportunities or strategic transaction; (10) the terms and availability of the indebtedness planned to be incurred in connection with the transaction to refinance NRCG’s existing indebtedness; (11) potential adverse changes to business relationships resulting from the announcement or completion of the transaction; (12) the combined companies’ ability to achieve the growth prospects and synergies expected from the transaction, as well as delays, challenges and expenses associated with integrating the combined companies’ existing businesses; and (13) legislative, regulatory and economic developments, including changing business conditions in the industries in which NRCG and US Ecology operate. These risks, as well as other risks associated with the proposed transaction, are more fully described in the preliminary joint proxy statement/prospectus, dated July 31, 2019, that was filed by US Ecology Parent, Inc. with the Securities and Exchange Commission (“SEC”) in connection with the proposed transaction. Investors and potential investors are urged not to place undue reliance on forward-looking statements in this communication, which speak only as of this date. NRCG undertakes no obligation to revise or update publicly any forward-looking statement to reflect future events or circumstances. Nothing contained herein constitutes or will be deemed to constitute a forecast, projection or estimate of the future financial performance of NRCG or the combined company, whether following the implementation of the proposed transaction or otherwise.

In addition, actual results are subject to other risks and uncertainties that relate more broadly to NRCG’s overall business, including those more fully described in NRCG’s filings with the SEC.

No Offer or Solicitation

This communication relates to a proposed business combination between US Ecology Parent, Inc., US Ecology and NRCG. The information in this communication is for informational purposes only and is neither an offer to purchase, nor a solicitation of an offer to sell, subscribe for or buy any securities or the solicitation of any vote in any jurisdiction pursuant to the proposed transactions or otherwise, nor shall there be any sale, issuance or transfer of securities in any jurisdiction in contravention of applicable law. No offer of securities shall be made except by means of a prospectus meeting the requirements of Section 10 of the Securities Act of 1933, as amended.

Additional Information and Where to Find It

In connection with the proposed transaction, US Ecology Parent, Inc. filed with the SEC a Registration Statement on Form S-4, dated July 31, 2019 that includes a preliminary joint proxy statement of US Ecology and NRCG and a prospectus of US Ecology Parent, Inc., as well as other relevant documents regarding the proposed transaction. The information in the preliminary joint proxy statement/prospectus is not complete and may be changed. US Ecology Parent, Inc. may not sell the securities referenced in the preliminary joint proxy statement/prospectus until the Registration Statement on Form S-4 filed with the SEC becomes effective. INVESTORS AND SECURITY HOLDERS ARE ENCOURAGED TO READ THE REGISTRATION STATEMENT, INCLUDING THE PRELIMINARY JOINT PROXY STATEMENT/PROSPECTUS, REGARDING THE MERGERS AND ANY OTHER RELEVANT DOCUMENTS FILED WITH THE SEC, AS WELL AS ANY AMENDMENTS OR SUPPLEMENTS TO THOSE DOCUMENTS, BECAUSE THESE DOCUMENTS WILL CONTAIN IMPORTANT INFORMATION ABOUT THE PROPOSED TRANSACTION. A definitive Joint Proxy Statement/Prospectus will be mailed to stockholders of US Ecology and NRCG. A free copy of the Joint Proxy Statement/Prospectus, as well as other filings containing information about US Ecology Parent, Inc., US Ecology and NRCG, may be obtained once it becomes available at the SEC’s website, www.sec.gov. You will also be able to obtain these documents, free of charge, by accessing US Ecology’s website at https://investors.usecology.com/ or by accessing NRCG’s website at http://ir.nrcg.com/.

Participants in the Solicitation Relating to the Mergers

US Ecology and NRCG and their respective directors and executive officers and other members of management and employees may be deemed to be participants in the solicitation of proxies from US Ecology stockholders and NRCG common stockholders in respect of the proposed transaction. Information regarding US Ecology’s directors and executive officers is contained in US Ecology’s Annual Report on Form 10-K for the year ended December 31, 2018 and its Proxy Statement on Schedule 14A, dated April 11, 2019, which are filed with the SEC. Information regarding NRCG’s directors and executive officers is contained in NRCG’s Annual Report on Form 10-K for the year ended December 31, 2018 and its Proxy Statement on Schedule 14A, dated April 17, 2019, which are filed with the SEC. Additional information regarding the interests of those participants and other persons who may be deemed participants in the transaction is included in the registration statement and joint proxy statement/prospectus and other relevant materials to be filed with the SEC. Free copies of these documents may be obtained as described in the preceding paragraph.

NRC GROUP HOLDINGS CORP AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands except share and per share amounts)

 

June 30,

 

December 31,

2019

 

2018

(Unaudited)

ASSETS
Current assets
Cash and cash equivalents

$

22,615

 

$

18,365

 

Receivables:
Trade, net of allowance for doubtful accounts of $2.5 million and $0.6 million, respectively

 

100,345

 

 

102,709

 

Other

 

1,227

 

 

1,112

 

Inventory

 

7,329

 

 

7,257

 

Prepaid expenses and other current assets

 

5,438

 

 

4,692

 

Total current assets

 

136,954

 

 

134,135

 

 
Property and equipment, net

 

156,534

 

 

122,565

 

Goodwill

 

52,864

 

 

51,417

 

Intangible assets, net of accumulated amortization of $38.5 million and $34.5 million, respectively

 

70,833

 

 

64,614

 

Other assets

 

4,081

 

 

3,396

 

Total assets

$

421,266

 

$

376,127

 

 
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable

$

34,373

 

$

36,171

 

Accrued expenses

 

11,293

 

 

10,644

 

Accrued wages and benefits

 

5,659

 

 

4,858

 

Contingent consideration

 

6,509

 

 

2,470

 

Deferred revenue

 

3,704

 

 

1,199

 

Other current liabilities

 

3,325

 

 

-

 

Current portion of term loans

 

3,431

 

 

3,431

 

Current portion of equipment loan

 

728

 

 

737

 

Borrowings outstanding under revolving credit agreements

 

43,000

 

 

10,000

 

Accrued dividend on Series A convertible preferred stock

 

1,838

 

 

1,511

 

Total current liabilities

 

113,860

 

 

71,021

 

 
Contingent consideration, net of current portion

 

4,886

 

 

3,846

 

Term loans, net of current portion and deferred financing costs

 

329,145

 

 

330,104

 

Equipment loan, net of current portion

 

979

 

 

78

 

Asset retirement obligation

 

1,346

 

 

1,379

 

Other long-term liabilities

 

13,445

 

 

1,243

 

Total liabilities

 

463,661

 

 

407,671

 

 
Commitments and contingencies
 
Shareholders' Equity (Deficit)
Series A Convertible Preferred Stock, par value $0.0001; 5,000,000 shares authorized; 1,050,000 issued with a liquidation preference of $105,000 as of June 30, 2019 and December 31, 2018.

 

102,967

 

 

102,967

 

Common stock, par value $0.0001; 200,000,000 shares authorized; 38,050,385 and 36,902,544 shares issued and outstanding as of June 30, 2019 and December 31, 2018, respectively.

 

4

 

 

4

 

Additional paid in capital

 

20,677

 

 

13,084

 

Accumulated deficit

 

(159,637

)

 

(141,062

)

Accumulated other comprehensive loss

 

(6,406

)

 

(6,537

)

Total shareholders' equity (deficit)

 

(42,395

)

 

(31,544

)

Total liabilities and shareholders' equity

$

421,266

 

$

376,127

 

NRC GROUP HOLDINGS CORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND

COMPREHENSIVE INCOME (LOSS)

(in thousands except share and per share amounts)

(unaudited)

 

Three Months Ended June 30,

 

Six Months Ended June 30,

2019

 

2018

 

2019

 

2018

 
Operating revenue

$

121,841

 

$

81,692

 

$

222,335

 

$

152,924

 

 
Costs and expenses
Operating expenses, including cost of revenue (exclusive of depreciation and amortization)

 

83,678

 

 

54,482

 

 

154,933

 

 

102,848

 

General and administrative expenses

 

17,188

 

 

12,740

 

 

34,081

 

 

23,135

 

Depreciation and amortization

 

9,678

 

 

5,325

 

 

18,690

 

 

11,784

 

Management fees

 

-

 

 

357

 

 

-

 

 

800

 

Acquisition expenses

 

10,715

 

 

2,064

 

 

11,162

 

 

3,286

 

Share-based compensation

 

1,268

 

 

-

 

 

1,268

 

 

-

 

Change in fair value of contingent consideration

 

2,026

 

 

-

 

 

4,077

 

 

-

 

Other expense, net

 

413

 

 

1,443

 

 

1,813

 

 

2,340

 

Total costs and expenses

 

124,966

 

 

76,411

 

 

226,024

 

 

144,193

 

Operating (loss) income

 

(3,125

)

 

5,281

 

 

(3,689

)

 

8,731

 

 
Other income (expenses)
Interest expense

 

(7,730

)

 

(3,963

)

 

(14,339

)

 

(7,633

)

Foreign currency transaction gain (loss)

 

(40

)

 

78

 

 

51

 

 

41

 

Loss on debt extinguishment

 

-

 

 

(2,720

)

 

-

 

 

(2,720

)

Other income (expense), net

 

(87

)

 

(23

)

 

89

 

 

(8

)

Total other expenses, net

 

(7,857

)

 

(6,628

)

 

(14,199

)

 

(10,320

)

Loss before income taxes

 

(10,982

)

 

(1,347

)

 

(17,888

)

 

(1,589

)

Income tax (benefit) expense

 

(867

)

 

(1,139

)

 

687

 

 

(1,020

)

Net loss

$

(10,115

)

$

(208

)

$

(18,575

)

$

(569

)

 
Other comprehensive income (loss), net of tax
Foreign currency translation (loss) income

 

(315

)

 

(1,245

)

 

131

 

 

(540

)

Total other comprehensive (loss) income

 

(315

)

 

(1,245

)

 

131

 

 

(540

)

Comprehensive loss

$

(10,430

)

$

(1,453

)

$

(18,444

)

$

(1,109

)

 
Net loss

$

(10,115

)

$

(208

)

$

(18,575

)

$

(569

)

Less dividend on Series A convertible preferred stock

 

(1,837

)

 

-

 

 

(3,675

)

 

-

 

Net loss attributable to common shareholders

$

(11,952

)

$

(208

)

$

(22,250

)

$

(569

)

 
Net loss per share, basic and diluted

$

(0.32

)

$

(0.01

)

$

(0.60

)

$

(0.03

)

Weighted average common shares outstanding, basic and diluted

 

37,545,840

 

 

21,873,680

 

 

37,225,969

 

 

21,873,680

 

 
Dividends declared per Series A convertible preferred share

$

1.75

 

 

-

 

$

3.50

 

 

-

 

NRC GROUP HOLDINGS CORP AND SUBSIDIARIES

SEGMENT PERFORMANCE

(in thousands)

(unaudited)

 
Domestic Domestic
Standby Environmental Corporate
Services Services International Sprint Items Total
Three Months Ended June 30,

2019

Operating revenue

$

9,671

 

$

82,071

 

$

9,314

 

$

20,785

 

$

-

 

 

$

121,841

Operating expenses, including cost of revenue (excluding depreciation, amortization and certain other expenses)

 

5,196

 

 

62,843

 

 

6,696

 

 

8,943

 

 

-

 

 

 

83,678

General and administrative expenses

 

991

 

 

7,163

 

 

958

 

 

4,105

 

 

3,971

 

 

 

17,188

Operating profit (exclusive of depreciation, amortization and certain other expenses)

 

3,484

 

 

12,065

 

 

1,660

 

 

7,737

 

 

(3,971

)

 

 

20,975

2018

 

 

 

 

 

 

 

 

 

 

 

Operating revenue

$

9,119

 

$

48,561

 

$

5,651

 

$

18,361

 

$

-

 

 

$

81,692

Operating expenses, including cost of revenue (excluding depreciation, amortization and certain other expenses)

 

4,467

 

 

38,346

 

 

3,721

 

 

7,948

 

 

-

 

 

 

54,482

General and administrative expenses

 

830

 

 

5,792

 

 

1,008

 

 

2,859

 

 

2,251

 

 

 

12,740

Operating profit (exclusive of depreciation, amortization and certain other expenses)

 

3,822

 

 

4,423

 

 

922

 

 

7,554

 

 

(2,251

)

 

 

14,470

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30,

 

 

 

 

 

 

 

 

 

 

 

2019

 

 

 

 

 

 

 

 

 

 

 

Operating revenue

$

20,064

 

$

142,937

 

$

17,461

 

$

41,873

 

$

-

 

 

$

222,335

Operating expenses, including cost of revenue (excluding depreciation, amortization and certain other expenses)

 

10,419

 

 

114,102

 

 

12,642

 

 

17,770

 

 

-

 

 

 

154,933

General and administrative expenses

 

1,940

 

 

14,362

 

 

1,855

 

 

7,856

 

 

8,068

 

 

 

34,081

Operating profit (exclusive of depreciation, amortization and certain other expenses)

 

7,705

 

 

14,473

 

 

2,964

 

 

16,247

 

 

(8,068

)

 

 

33,321

Goodwill

 

-

 

 

32,014

 

 

1,865

 

 

18,985

 

 

-

 

 

 

52,864

Assets

 

77,576

 

 

182,438

 

 

19,677

 

 

150,823

 

 

(9,248

)

 

 

421,266

2018

 

 

 

 

 

 

 

 

 

 

 

Operating revenue

$

18,091

 

$

89,418

 

$

10,444

 

$

34,971

 

$

-

 

 

$

152,924

Operating expenses, including cost of revenue (excluding depreciation, amortization and certain other expenses)

 

8,156

 

 

72,152

 

 

7,065

 

 

15,475

 

 

-

 

 

 

102,848

General and administrative expenses

 

1,619

 

 

10,372

 

 

1,710

 

 

5,470

 

 

3,964

 

 

 

23,135

Operating profit (exclusive of depreciation, amortization and certain other expenses)

 

8,316

 

 

6,894

 

 

1,669

 

 

14,026

 

 

(3,964

)

 

 

26,941

Goodwill

 

-

 

 

31,008

 

 

2,620

 

 

10,935

 

 

-

 

 

 

44,563

Assets

 

76,245

 

 

159,054

 

 

20,092

 

 

92,772

 

 

(18,935

)

 

 

329,228

Reconciliation of Non-GAAP Financial Measures

Adjusted EBITDA and Free Cash Flow Conversion

This release uses the term “Adjusted EBITDA,” which is not a recognized measure under GAAP. The Company uses Adjusted EBITDA as a supplement to its GAAP results in evaluating certain aspects of its business, as described below. For purposes of this release, the Company defines Adjusted EBITDA as net income (loss) plus (i) depreciation and amortization, (ii) interest expense, net, (iii) provision for income taxes, net (net income (loss) plus clauses (i) through (iii) referred to collectively as “EBITDA”), (iv) foreign currency translation gain or loss and (v) gain or loss on equipment sales or retirements, adjusted to include certain add-backs permitted by the Company’s new senior credit facility dated June 11, 2018 (as amended, the “New Credit Facility”), including (i) management fees, (ii) impairment expense of goodwill and intangible assets, (iii) acquisition-related transaction expenses (including due diligence costs, legal, accounting and other advisory fees and costs, retention and severance payments, facility closure costs and financing fees and expenses), (iv) the impact of pre-acquisition revenues, earnings and EBITDA of certain recent acquisitions and certain management estimates relating thereto, (v) normalization adjustments to reflect a run-rate level of EBITDA within NRC Group’s historical financial statements, (vi) non-recurring costs and other non-operating expenses and income, (vii) the impact of certain completed cost savings initiatives at various domestic regions, (viii) the impact of a reduction in force adjustment, (ix) costs relating to the shutdown of certain international operations and (x) certain out-of-period timing adjustments and reclassification of capitalized leases not applicable under the New Credit Facility. “Adjusted EBITDA” is substantially the same as the metric called “Consolidated Adjusted EBITDA,” as defined in the New Credit Facility, which is a key component in the determination of the Company’s leverage ratios (including its ability to service debt and incur capital expenditures).

The Company’s method of computing Adjusted EBITDA is substantially consistent with that used for debt covenant calculation purposes under the New Credit Facility and also is routinely reviewed by management for that purpose. For example, under the New Credit Facility if as of the last day of any fiscal quarter the sum of the aggregate outstanding principal amount of all revolving loans plus the aggregate amount of letters of credit obligations (excluding letters of credit to the extent cash collateralized and undrawn letters of credit in an aggregate amount not to exceed $15 million) plus the aggregate outstanding principal amount of all swingline loans exceeds 30% of the revolving credit limit then in effect, the Company is required to maintain a consolidated total net leverage ratio, calculated in accordance with the New Credit Facility, of equal to or less than 5.45:1.00. The total net leverage ratio is the ratio of consolidated total net debt (as defined in the New Credit Facility) to Consolidated Adjusted EBITDA (as defined in the New Credit Facility). This covenant is not currently in effect.

The Company believes its presentation of Adjusted EBITDA is useful because it provides investors and industry analysts the same information that it uses internally for purposes of assessing its liquidity and core operating performance. However, Adjusted EBITDA is not a substitute for, or more meaningful than, net income (loss), cash flows from operating activities, operating income or any other measure prescribed by GAAP, and there are limitations to using non-GAAP measures such as Adjusted EBITDA. Certain items excluded from Adjusted EBITDA are significant components in understanding and assessing a company’s financial performance, such as a company’s cost of capital, tax structure and the historic costs of depreciable assets. Additionally, certain items excluded from Adjusted EBITDA are also significant components in understanding and assessing the Company’s liquidity, such as interest payments, payments made for transaction expenses and extraordinary items and management fees. Also, other companies in the Company’s industry may define Adjusted EBITDA differently than it does, and as a result, it may be difficult to use Adjusted EBITDA or similarly named non-GAAP measures that other companies may use to compare the liquidity or performance of those companies to the Company’s liquidity or performance. Because of these limitations, Adjusted EBITDA should not be considered as a measure of the income generated by the Company’s business or cash flow available to it to invest in the growth of its business. The Company’s management compensates for these limitations by relying primarily on GAAP results and using Adjusted EBITDA supplementally.

The release also uses the term “Free cash flow conversion,” which is not a recognized measure under GAAP. The Company uses Free cash flow conversion as a supplement to its GAAP results because it believes it is useful to show investors the ongoing liquidity of the business after required capital expenditure investments. For purposes of this release, the Company defines Free cash flow conversion as Adjusted EBITDA less total capex (excluding one-time waste-disposal investments) divided by Adjusted EBITDA. Free cash flow conversion is not a substitute for, or more meaningful than, its comparable GAAP measure, and there are limitations to using non-GAAP measures such as Free cash flow conversion.

A reconciliation of net cash provided by operating activities to net income (loss) to Adjusted EBITDA and Free cash flow conversion for the periods indicated is as follows:

For the Quarter Ended June 30,

 

For the Six Months Ended June 30,

($ thousands)

2019

 

2018

 

2019

 

2018

Net cash provided by operating activities

 

6,648

 

 

144

 

 

5,845

 

 

6,451

 

Depreciation of property and equipment

 

(7,659

)

 

(4,111

)

 

(14,807

)

 

(9,017

)

Amortization of intangible assets

 

(2,019

)

 

(1,227

)

 

(3,883

)

 

(2,767

)

Accretion of asset retirement obligation

 

(27

)

 

(13

)

 

(54

)

 

(26

)

Amortization of deferred financing costs

 

(419

)

 

(552

)

 

(855

)

 

(835

)

Share-based compensation expense

 

(1,268

)

 

-

 

 

(1,268

)

 

-

 

Bad debt expense

 

(948

)

 

(146

)

 

(2,212

)

 

(271

)

Change in fair value of contingent consideration

 

(2,026

)

 

-

 

 

(4,077

)

 

-

 

Deferred income tax provision

 

-

 

 

-

 

 

-

 

 

(23

)

Realized loss (gain) from equipment sales or retirements

 

57

 

 

-

 

 

381

 

 

-

 

Loss on extinguishment of debt

 

-

 

 

(2,720

)

 

-

 

 

(2,720

)

Non-cash OIT acquisition related expense

 

(10,000

)

 

-

 

 

(10,000

)

 

-

 

Changes in operating assets and liabilities, net of acquisition:

 

7,546

 

 

8,417

 

 

12,355

 

 

8,639

 

Net income (loss) 1

 

(10,115

)

 

(208

)

 

(18,575

)

 

(569

)

 
Total income tax expense (benefit)

 

(867

)

 

(1,139

)

 

687

 

 

(1,020

)

Interest expense

 

7,730

 

 

3,963

 

 

14,339

 

 

7,633

 

Foreign currency transaction gain (loss)

 

40

 

 

(78

)

 

(51

)

 

(41

)

Loss on debt extinguishment

 

-

 

 

2,720

 

 

-

 

 

2,720

 

Change in fair value of contingent consideration

 

2,026

 

 

-

 

 

4,077

 

 

-

 

Share-based compensation

 

1,268

 

 

-

 

 

1,268

 

 

-

 

Other expense, net

 

420

 

 

30

 

 

1,229

 

 

8

 

Depreciation and amortization

 

9,678

 

 

5,325

 

 

18,690

 

 

11,784

 

Management fees

 

-

 

 

550

 

 

-

 

 

800

 

Acquisition Transaction expenses

 

10,714

 

 

2,064

 

 

11,162

 

 

3,286

 

Transition expenses and extraordinary items 2

 

59

 

 

1,436

 

 

408

 

 

2,340

 

Pre-NRC EBITDA contribution 3

 

-

 

 

(1,381

)

 

-

 

 

(1,708

)

Restructuring and Large Event Adjustments 4

 

68

 

 

2,158

 

 

252

 

 

2,967

 

Estimated SWS Acquisition Synergies 5

 

211

 

 

961

 

 

1,049

 

 

1,923

 

Expenses not in the normal course of business 6

 

244

 

 

167

 

 

475

 

 

522

 

Reorganization Adjustments 7

 

842

 

 

1,069

 

 

1,749

 

 

2,763

 

Reclassification items 8

 

1,007

 

 

615

 

 

3,753

 

 

2,313

 

Total Adjustments

 

33,441

 

 

18,461

 

 

59,087

 

 

36,290

 

 
Adjusted EBITDA, per Credit Agreement

$

23,326

 

$

18,253

 

$

40,512

 

$

35,721

 

 
Pro Forma Capital Expenditures
Total Capex

 

15,262

 

 

2,654

 

 

21,549

 

 

7,386

 

Less: One-time Waste Disposal Investment

 

(10,502

)

 

(180

)

 

(15,165

)

 

(330

)

Adj. Capex

 

4,760

 

 

2,474

 

 

6,384

 

 

7,056

 

 
Adj. EBITDA less Adj. Capex

 

18,566

 

 

15,779

 

 

34,128

 

 

28,665

 

Free Cash Flow Conversion

 

80

%

 

86

%

 

84

%

 

80

%

Footnotes

1 GAAP net income.

2 Consists of one-time set-up costs for growth opportunities in Mexico, senior management placement fees, as well as expenses related to add-on acquisitions such as severance, one-time legal, rebranding, and closure costs.

3 Stub period Reported EBITDA of certain NRC acquisitions prior to NRC acquisition.

4 NRC normalized results from SoCal and New England regions, which underwent material reorganization starting in April 2017. These adjustments are evidenced by increased performance in Q1 2018 vs. Q1 2017. This also includes the savings from terminating SWS corporate employees as well as the remaining financial results associated with the closed SWS service centers. Sprint normalized results consist of the impact of Hurricane Harvey-related closure of the Karnes Facility and temporarily low margins during the start-up phase of the Pecos facility.

5 Consists of identified hard cost savings from planned headcount reductions, insurance savings and purchasing efficiencies from integration the SWS acquisition. Actions have taken or are currently taking place.

6 NRC includes identified one-time, non-recurring expenses including severance, consulting, lawsuit settlement and other expenses not anticipated to occur in future periods. Sprint consists of extraordinary, non-recurring items including ad-back of landfill rental equipment that has been purchased and start-up costs for a new yard.

7 NRC consists of savings realized from cost reduction initiatives completed in the PNW, NoCal and East regions, including headcount reductions and procurement along with a reduction-in-force completed in April 2018 and Sept 2018. Sprint consists of the impact of price increases implemented by Sprint since late 2017 at the Karnes Facility as well as the removal of non-recurring operating costs associated with the disposal pit.

8 Consists of out-of-period timing adjustments and reclassification of capitalized leases stemming from the PCAOB audit which are not applicable under the Credit Agreement.

 

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