Business context and reporting period
Advanced Emissions Solutions, Inc. (ADES; ticker ADES) filed this unaudited Form 10-Q for the quarter ended September 30, 2021. The filing describes two segments: Advanced Purification Technologies (APT), which sells activated carbon and related consumables, and Refined Coal (RC), which earns equity-method income and royalties from Tinuum entities. The filing is for Advanced Emissions Solutions, Inc., not Arq, Inc.
Financial performance
Amounts below are in millions of dollars unless noted.
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $28.9 | $19.5 | $69.6 | $43.2 |
| Operating income (loss) | $3.3 | $(2.8) | $4.1 | $(42.5) |
| Equity-method earnings | $22.2 | $9.5 | $61.9 | $26.0 |
| Net income (loss) | $24.3 | $5.0 | $54.6 | $(20.7) |
| Diluted EPS | $1.31 | $0.27 | $2.96 | $(1.15) |
| Operating cash flow | Not separately reported | Not separately reported | $24.7 | $34.9 |
- Revenue rose 48% in Q3 and 61% for the first nine months. Consumables revenue increased 56% and 74%, respectively, mainly on higher volumes, including supply-agreement sales to Cabot, and favorable pricing. Related-party license royalties increased 15% and 19%.
- Consumables cost of revenue was $18.0 million in Q3 and $43.7 million for the nine-month period. Revenue less this cost was $6.7 million and $14.0 million, respectively; this is not a consolidated gross margin because it excludes other expenses and does not capture costs associated with equity-method earnings.
- Q3 earnings included $22.2 million of equity-method earnings, chiefly from Tinuum Group, and a $3.3 million PPP-loan forgiveness gain. Nine-month earnings also included a $1.9 million gain from a revised mine-reclamation estimate. These items are important context for assessing recurring profitability.
- Cash, cash equivalents and restricted cash totaled $82.1 million at September 30, including $16.0 million restricted. Cash and restricted cash increased $46.2 million over the nine-month period. Operating cash flow was $24.7 million; investing cash flow was $38.9 million, including $44.7 million of Tinuum distributions classified as investing after the investment carrying value reached zero.
- Total debt obligations were $4.4 million, consisting of finance leases; the $16.0 million related-party term loan was repaid in full in June. No line-of-credit borrowings were outstanding, with $1.7 million reported available. Current liabilities were $24.5 million and current assets were $101.8 million.
- Consumables cost increases and temporary plant outages affected margins. Management said higher volumes lowered fixed costs per pound, while purchased inventory and high plant utilization weighed on margins. The filing does not provide a consolidated gross-margin percentage.
Material changes versus the prior comparable period
- Higher APT sales and higher Tinuum equity earnings drove stronger reported revenue and income. For the nine months, APT segment operating income was $4.9 million versus a $40.6 million loss, partly reflecting the absence of the $26.1 million long-lived-asset impairment recorded in 2020.
- Cash distributions from equity-method investees were $66.8 million for the first nine months, versus $42.2 million a year earlier. ADES recognized some Tinuum distributions in earnings when they exceeded the carrying value of its investment; thus equity earnings and cash receipts should not be treated as equivalent.
- Financing risk declined following repayment of the senior term loan and forgiveness of the $3.3 million PPP loan. Nine-month operating cash flow nevertheless decreased by $10.2 million year over year, while investing cash flow improved mainly because of distributions in excess of cumulative equity-method earnings.
- Restricted cash for the mine surety arrangement rose to $10.0 million from $5.0 million at year-end 2020. The company also had $6.0 million of short-term restricted cash tied to a line-of-credit minimum-cash covenant.
Outlook, risks and unusual items
- RC wind-down: The Section 45 tax-credit period was expected to expire December 31, 2021. Seven Tinuum Group facilities had ceased operating by September 30, with the remaining facilities expected to stop in Q4. Management expected RC earnings and distributions to substantially cease after year-end, with final distributions potentially in 2022. The loss of equity earnings, distributions and royalties was expected to materially adversely affect results.
- APT outlook: Management expected continued product demand and said the Cabot supply agreement should support volume, operating efficiencies and diversification beyond power generation. It also expected continued inventory purchases into 2022 following lost production and high plant utilization. These expectations depend on demand, pricing, production capacity and execution.
- Liquidity and spending: Management expected cash on hand at December 31, 2021 to provide sufficient liquidity to fund 2022 operations. It forecast 2021 capital expenditures of $9.8 million and stated that annual capital expenditures excluding Cabot-specific projects were expected to average about $5.0 million from 2022 onward. These are management estimates, not guarantees.
- Concentration and market risks: ADES operates a single activated-carbon manufacturing plant, the Red River Plant; damage, downtime or insufficient capacity could impair customer supply. Demand is sensitive to coal-fired generation, natural-gas and renewable-energy prices, electricity demand and weather. COVID-19-related disruption and possible employee vaccine/testing requirements were also cited as risks.
- Reclamation and contingencies: Marshall Mine reclamation obligations were revised downward by $1.9 million, producing a gain. The company reported $24.1 million of surety bonds for mine reclamation and $10.0 million of restricted cash securing the Surety Agreement. A called bond could create reimbursement obligations. No significant legal proceedings were reported, and management said no loss was probable for certain Tinuum-related guarantees.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether Tinuum facilities actually wound down as expected and how much cash was ultimately distributed after 2021.
- How APT revenue, pricing, product mix, purchased-inventory costs and Red River Plant utilization affected recurring margins and cash generation.
- Whether Cabot-related sales and capital reimbursements support the projected APT growth and offset production, capital and reclamation costs.
- The unrestricted portion of cash and the timing and adequacy of funds for mine reclamation, restricted-cash requirements and other obligations.
- How much reported income depends on equity-method accounting, excess distributions, debt forgiveness and the reclamation-estimate gain rather than ongoing operating performance.