Business context and reporting period
This is Advanced Emissions Solutions, Inc. (ADES; Nasdaq: ADES), not Arq, Inc. The filing reports the quarter and six months ended June 30, 2020; financial statements are unaudited. ADES sells emissions-control consumables and earns royalties and equity income from refined-coal businesses.
Financial performance and position
- Second-quarter revenue: $11.5 million, down 26% from $15.6 million a year earlier. Consumables revenue fell 28% to $8.2 million; related-party royalties fell 21% to $3.3 million.
- Second-quarter results: Operating loss was $31.1 million, including a $26.1 million long-lived-asset impairment. Net loss was $23.8 million, or $1.32 per diluted share, versus net income of $8.1 million, or $0.44 per diluted share.
- First-half results: Revenue was $23.7 million, down 32%; net loss was $25.7 million versus net income of $22.5 million in 2019. Equity-method earnings fell 61% to $16.4 million.
- Margins: Second-quarter consumables gross margin before depreciation and amortization was positive, compared with a loss in the prior-year quarter. First-half consumables gross margin was negative, reflecting lower volume and fixed costs.
- Cash flow: Operating cash flow was $24.1 million for the first half, versus $30.6 million. Cash, cash equivalents and restricted cash totaled $21.7 million at June 30, including $5.0 million restricted. Operating cash flow included $32.5 million of distributions from equity-method investees.
- Debt and liquidity: Debt carrying value was $35.7 million, of which $25.6 million was current. The company had $16.7 million of unrestricted cash and $5.0 million of unused availability under its line of credit, which matures September 30, 2020. It received a $3.3 million PPP loan at 1% interest; forgiveness is subject to SBA approval.
- Balance sheet: Total assets were $133.3 million, down from $173.8 million at December 31, 2019. Stockholders’ equity was $79.1 million, down from $108.3 million.
Material changes, outlook and risks
- Management recorded a $26.1 million impairment after estimating the affected asset group’s fair value at $32.2 million, below its $58.3 million carrying value. Further impairment is possible if coal-fired dispatch and cash-flow expectations worsen.
- Coal-fired power generation fell approximately 26% year over year in the quarter and 30% in the first half, according to the EIA. Management attributed weaker consumables sales to lower coal dispatch and increased competition from other generation sources.
- Refined-coal equity earnings were pressured by higher depreciation, reduced lease payments from a large customer, and the termination of leases associated with two utility closures. Management expects these factors to weigh on earnings through 2020 and 2021. Section 45 tax credits are scheduled to expire in 2021.
- Management estimated future Tinuum cash flows through 2021 at $100 million to $125 million, reduced from its prior $125 million to $150 million range. This estimate assumes, among other things, lease renewals, expected coal generation and no material unexpected costs.
- COVID-19 led to employee sequestration, hazard pay and other operating costs; the company reported $0.4 million of sequestration-related costs. Management warned that prolonged disruption could increase costs, reduce demand and disrupt customers or suppliers. It stated that existing cash and operating cash flows were expected to cover liquidity needs for at least 12 months.
- The CEO resigned effective June 30, 2020. The company recorded approximately $1.4 million in severance-related compensation. No significant legal proceedings were reported; contingent guarantees related to Tinuum were not accrued because management did not consider a loss probable.
- No formal earnings guidance was provided. The company reported no material change in contractual obligations outside the ordinary course and stated that disclosure controls were effective.
Important facts for investors to verify
- Confirm the intended issuer: this filing is for Advanced Emissions Solutions, Inc. (ADES), not Arq, Inc.
- Track coal-fired dispatch, consumables volumes and margins, and whether the impairment assumptions lead to further write-downs.
- Monitor Tinuum facility leases, customer concentration, distributions and the $100 million to $125 million cash-flow estimate through 2021, including the Section 45 tax-credit expiration.
- Review the term-loan repayment schedule and covenant headroom, the September 2020 line-of-credit maturity, and any SBA decision on PPP loan forgiveness.
- Assess the impact of COVID-19 on operating costs, customer demand, cash generation and the company’s liquidity forecast.