Arq, Inc. — 2019 Q1 Form 10-Q Summary
Filing identity: The supplied filing is for Advanced Emissions Solutions, Inc. (ADES; Nasdaq: ADES), not Arq, Inc. It covers the quarter ended March 31, 2019; financial statements are unaudited. Confirm the issuer before relying on this summary.
Business context
ADES operates in Refined Coal (RC) and Power Generation and Industrials (PGI). RC earnings largely come from equity-method investments in Tinuum Group and Tinuum Services, plus related-party license royalties. PGI sells emissions-control consumables. ADES acquired Carbon Solutions, an activated-carbon producer and lignite mine operator, in December 2018; its results are included in Q1 2019 but not Q1 2018.
Key financial results
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Revenue | $19.3 million | $3.9 million |
| Operating loss | $3.6 million | $1.7 million |
| Equity-method earnings | $21.7 million | $12.3 million |
| Interest expense | $2.1 million | $0.3 million |
| Income tax expense | $1.7 million | $2.6 million |
| Net income | $14.4 million | $7.7 million |
| Basic / diluted EPS | $0.79 / $0.78 | $0.37 / $0.37 |
| Consolidated EBITDA (non-GAAP) | $20.2 million | $10.7 million |
| Operating cash flow | $16.0 million | $0.1 million |
Revenue rose 396%, largely reflecting Carbon Solutions and higher consumables sales; the prior-year quarter did not include the acquired business. Consumables cost of revenue was $14.1 million and included approximately $3.6 million of acquisition-related inventory fair-value step-up expense. The filing does not provide a directly comparable consolidated gross margin. RC segment operating income was $25.4 million versus $14.7 million; PGI segment operating loss was $3.5 million versus $0.9 million.
Liquidity, debt and cash flows
- Cash, cash equivalents and restricted cash totaled $25.9 million at quarter-end, including $5.2 million of long-term restricted cash. Current assets were $56.2 million and current liabilities $39.8 million.
- Debt and finance lease obligations totaled $68.2 million, including a $64.0 million gross related-party senior term loan and $7.8 million of finance leases; the loan is presented net of unamortized issuance costs and discount. The term loan had $24.2 million classified as current and $44.0 million of long-term debt reported on the balance sheet.
- The $70 million term loan matures in December 2021, bears interest at three-month LIBOR (subject to a 1.5% floor) plus 4.75%, and requires quarterly principal payments of $6 million. ADES made a $6 million payment in Q1. No line-of-credit borrowings were outstanding; availability was $5 million.
- Investing cash flow was a use of $2.1 million; financing cash flow was a use of $11.9 million, including dividends, share repurchases and debt principal payments. Dividends paid were $4.6 million and repurchases were $0.7 million.
Material changes and unusual items
- Tinuum Group completed a sale of an RC facility in Q1. The filing attributes much of the increase in equity earnings to this sale and to Tinuum Group’s adoption of new revenue-recognition and lease standards, which caused the sale to be recognized at a point in time.
- ADES recorded a $28.8 million cumulative increase to opening retained earnings from its share of Tinuum Group’s accounting-adoption adjustment, increasing its Tinuum Group investment by $37.2 million and establishing an $8.4 million deferred tax liability. This was an accounting adjustment, not Q1 operating cash generation.
- ADES reduced its deferred-tax valuation allowance by $4.0 million, primarily reflecting forecasts of future taxable income and an additional RC facility. The reported effective tax rate was 11%, versus 25% a year earlier.
- Operating leases were recognized on the balance sheet upon adoption of ASC 842; ADES recorded approximately $7.0 million of right-of-use assets and lease liabilities at adoption.
Outlook, commentary and risks
Management estimated future cash flows from Tinuum through 2021 at $200–$225 million. This is an estimate, not formal consolidated earnings guidance. It assumes 20 invested facilities, no material unexpected costs, continued coal-fired generation, continued lease renewals without termination or repricing, and no operation of retained facilities. Additional invested facilities could increase the estimate. Management expected increased capital needs following the Carbon Solutions acquisition and noted planned manufacturing-facility maintenance in Q2 2019.
ADES depends substantially on Tinuum-related earnings and distributions. The filing states that 11 of Tinuum Group’s 20 invested facilities were leased to one customer; loss of that customer could materially harm Tinuum and ADES. The term loan is secured by substantially all ADES assets, including cash flows from the Tinuum entities, and includes minimum-cash and future-cash-flow covenants. Dividends and buybacks are subject to loan conditions and a $30 million annual combined limit. Management reported no significant legal proceedings, no material risk-factor updates, and effective disclosure controls as of March 31, 2019.
Important facts for investors to verify
- Confirm that ADES, rather than Arq, Inc., is the intended company for this filing.
- Assess how much of Q1 earnings came from the facility sale, accounting changes and tax-valuation-allowance release, and whether those effects recur.
- Review Tinuum’s customer concentration, lease-renewal assumptions, facility economics and the basis for the $200–$225 million cash-flow estimate.
- Check debt covenant compliance, the related-party loan terms, scheduled repayments and the amount of cash that is restricted or otherwise available.
- Evaluate Carbon Solutions’ sustainable margins, remaining inventory step-up expense, planned maintenance and expected capital spending.