Business context and reporting period
This is the unaudited Form 10-Q for the quarter and nine months ended September 30, 2017. The filing identifies the registrant as Advanced Emissions Solutions, Inc. (ADES), not Arq, Inc.; verify that this is the intended filing.
ADES provides emissions-control equipment and chemicals to coal-fired power and industrial boiler customers. Its Refined Coal (RC) business earns equity-method income and royalties, primarily through investments in Tinuum Group and Tinuum Services.
Key financial metrics
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $2.3 million | $15.7 million | $35.1 million | $47.0 million |
| Operating loss | $(3.9) million | $(2.9) million | $(9.5) million | $(10.9) million |
| Net income | $5.8 million | $9.6 million | $20.9 million | $21.8 million |
| Diluted EPS | $0.28 | $0.43 | $0.96 | $0.97 |
| Operating cash flow | Not stated separately | Not stated separately | $(9.1) million | $(15.5) million |
At September 30, cash and cash equivalents were $26.8 million; restricted cash was zero. Current assets were $33.0 million and current liabilities $12.3 million. Total assets were $89.1 million, liabilities $14.5 million, and stockholders’ equity $74.6 million. No borrowings were outstanding on the $10 million line of credit; $4.5 million of letters of credit were secured under it, leaving $5.5 million borrowing availability and $3.5 million LC availability.
For the first nine months, investing activities provided $33.0 million, principally from $33.4 million of Tinuum Group distributions classified as in excess of investment basis. Financing used $24.0 million, including $10.5 million in dividends and approximately $13.0 million for share repurchases. Cash plus restricted cash decreased $0.1 million.
Material changes versus prior periods
- Q3 revenue fell 85%, chiefly because equipment sales dropped from $14.9 million to $1.6 million as major equipment projects had been completed in prior periods. Nine-month revenue declined 25%.
- For the nine months, equipment sales fell 30% to $31.3 million, while chemicals revenue more than doubled to $3.8 million. Chemical gross margins were lower because of price compression and customer field testing.
- RC equity-method earnings rose 20% to $36.1 million for the nine months, and related-party royalties rose 64% to $6.4 million. RC segment operating income increased to $40.1 million from $34.0 million. Emissions Control segment operating income fell to $1.3 million from $9.7 million.
- Lower payroll, rent, and legal and professional expenses reflected 2016 restructuring, reduced headcount, relocation to a smaller office, and completion of much of the prior financial-statement restatement work.
- Income tax expense increased to $12.6 million from $0.7 million for the nine months; the 2017 effective tax rate was 38%. Management attributed the change largely to partial release of the deferred-tax-asset valuation allowance at year-end 2016 and resulting recognition of federal and state tax expense.
Outlook, risks, and unusual items
- Management expects no future long-term fixed-price ACI and DSI equipment contracts, as deadlines for relevant emissions standards have passed. It identifies chemical sales growth as the EC business’s primary focus, while warning of competition, long lead-to-sale cycles, price pressure, and the expected loss of a major chemical customer. Consulting revenue is not expected to be material in the near term.
- Management says liquidity and future cash generation depend in part on Tinuum distributions and royalties, execution of contracts, additional tax-equity investors for certain RC facilities, and growth in EC product sales. Continuation of dividends is forward-looking, not assured.
- A revised forecast for the Red River Plant led to a $3.4 million reduction in the Royalty Award accrual. The remaining accrual was $4.5 million at September 30; actual future amounts may vary with plant revenues. A $4.5 million LC secured the award.
- The Department of Labor was investigating the company’s retirement plan. ADES accrued $0.5 million for a probable payment, but actual payment could exceed the estimate. ADES also disclosed contingent Tinuum Group guarantees for which it recorded no liability, stating a loss was not probable.
- Other items included a $0.5 million impairment of the Highview investment and $0.5 million of Section 45 tax credits earned in the quarter’s retained-facility activity (the filing reports $1.1 million for the nine-month period). The company held $50.3 million of deferred tax assets at September 30.
- ADES planned to adopt revenue standard ASC 606 on January 1, 2018 using the modified retrospective method. Its current estimate is that adoption will accelerate equipment revenue recognition and reduce accumulated deficit by approximately $2.2 million for equipment projects and $1.7 million for a licensing arrangement; the assessment could change.
- Subsequent to quarter-end, the board declared a $0.25-per-share dividend payable December 6, 2017. On November 6, ADES agreed to receive $3.5 million from a former service provider, expected during Q4.
Important facts for investors to verify
- Confirm the company identity: the supplied filing is for Advanced Emissions Solutions, Inc., while the request names Arq, Inc.
- Assess the sustainability and cash conversion of earnings, particularly Tinuum-related income recognized from distributions while the Tinuum Group investment carrying value is zero.
- Verify the outlook for Tinuum facility operations, distributions, tax-credit eligibility, and access to tax-equity investors.
- Monitor chemical customer retention, pricing, margins, and the expected cessation of purchases by a major customer.
- Track final amounts and timing for the Royalty Award, the retirement-plan investigation, and the $3.5 million settlement receivable.
- Check the final financial-statement effects of ASC 606 adoption and the company’s ability to realize deferred tax assets.