Business context and reporting period
Advanced Emissions Solutions, Inc. (ADES; ticker ADES) filed this unaudited Form 10-Q for the quarter ended March 31, 2020. The filing describes two segments: Refined Coal (RC), including equity-method investments and royalties, and Power Generation and Industrials (PGI), which sells emissions-control consumables. Entity check: the request metadata names Arq, Inc., but the filing identifies Advanced Emissions Solutions, Inc.; verify that this is the intended issuer.
Key financial metrics
| Metric | Q1 2020 | Q1 2019 / comparison |
|---|---|---|
| Revenue | $12.3 million | $19.3 million; down 37% |
| Net income (loss) | $(1.9) million | $14.4 million |
| Diluted earnings (loss) per share | $(0.11) | $0.78 |
| Operating income (loss) | $(8.6) million | $(3.6) million |
| Operating cash flow | $13.2 million | $16.0 million |
| Capital expenditures and mine development | $1.7 million | $1.4 million |
| Cash and cash equivalents, March 31 | $12.2 million; plus $5.0 million restricted cash | Combined cash and restricted cash was $17.1 million at Dec. 31, 2019 |
| Debt | $38.4 million carrying value, including $34.0 million senior term-loan principal and $6.4 million finance leases | $44.4 million carrying value at Dec. 31, 2019 |
| Current assets / current liabilities | $42.1 million / $39.0 million | $47.0 million / $39.3 million at Dec. 31, 2019 |
Consumables revenue was $9.2 million, down 39%; related cost of revenue was $11.5 million, so consumables gross margin before depreciation and amortization was negative. License royalties were $3.0 million, down 28%. Equity-method earnings fell to $8.3 million from $21.7 million. Cash distributions from equity-method investees were $17.1 million, down from $19.5 million. The company declared a $0.25-per-share dividend and paid $4.5 million in dividends.
Material changes and management commentary
- PGI segment operating loss widened to $6.6 million from $3.5 million, largely reflecting lower consumables sales and negative margins as coal-fired power dispatch declined approximately 33% year over year.
- RC segment operating income fell to $10.9 million from $25.2 million. Tinuum Group earnings declined amid higher depreciation, lower lease payments after renegotiations with its largest customer, and the closure of two utilities with invested facilities. ADES said these factors are expected to weigh on earnings and distributions through 2020 and 2021.
- Management lowered its estimate of Tinuum cash flows through 2021 to $125–$150 million from $150–$175 million. This estimate includes distributions and royalties, net of estimated taxes and 453A interest, and depends on facility, lease, customer, and power-generation assumptions.
- The Senior Term Loan requires quarterly principal payments of $6.0 million, bears interest at three-month LIBOR (subject to a 1.5% floor) plus 4.75%, and matures in December 2021. ADES paid $6.0 million principal in Q1; no borrowings were outstanding on its $5.0 million line of credit. The loan is secured by substantially all company assets, subject to stated exclusions, and includes minimum-cash and refined-coal cash-flow covenants.
- COVID-19 had not materially affected Q1 financial results, but management anticipated higher Q2 operating costs from reduced plant capacity, employee sequestration and hazard pay, operating inefficiencies, and possible supply-chain disruption. The company remained operational as a designated critical infrastructure supplier. It expected current liquidity and operating cash flows to cover needs for at least 12 months, while warning that a deeper or prolonged impact could increase cash needs.
- After quarter-end, ADES received a $3.3 million Paycheck Protection Program loan at 1% interest, with potential forgiveness subject to program terms. Apollo amended the term loan to permit the PPP borrowing.
Risks, contingencies, and unusual items
- Tinuum’s Section 45 tax-credit eligibility is expected to expire no later than 2021. Eight of Tinuum Group’s 20 invested facilities were leased to a single customer; loss of that customer or expiration of the credits could materially affect ADES.
- Coal demand and ADES product sales are exposed to electricity demand, weather, natural-gas and renewable-energy competition, and coal-fired dispatch. Management also warned that COVID-19 could delay customer orders and Tinuum facility sales or leases.
- Q1 tax expense was $0.4 million despite a $1.5 million pretax loss; a $0.9 million increase in the deferred-tax valuation allowance contributed to the expense.
- The filing reported no significant legal proceedings and no material restructuring activity in Q1. It disclosed limited contingent guarantees related to Tinuum Group but recorded no liability because management did not consider a loss probable.
Important facts for investors to verify
- Confirm issuer identity: the filing is for Advanced Emissions Solutions, Inc., not Arq, Inc.
- Track Tinuum’s customer concentration, lease renewals and renegotiations, facility closures, distributions, and the assumptions underlying the reduced $125–$150 million cash-flow estimate.
- Monitor Section 45 tax-credit expiration in 2021 and its effect on Tinuum and ADES earnings and cash flows.
- Assess the sustainability of PGI demand, consumables margins, and COVID-related operating and supply-chain costs.
- Check senior-loan covenant compliance and repayment capacity, and the terms and potential forgiveness of the PPP loan.