Business context and reporting period
This is Advanced Emissions Solutions, Inc. (ADES) Form 10-Q for the quarter and nine months ended September 30, 2020. The request identifies Arq, Inc.; the supplied filing names Advanced Emissions Solutions, Inc. (ticker ADES), so verify the issuer before relying on this summary.
ADES sells activated-carbon and other consumable pollution-control products through its Power Generation and Industrials (PGI) segment. Its Refined Coal (RC) segment earns royalties and equity-method income through interests in Tinuum Group and Tinuum Services. All amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial results and liquidity
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $19.5 | $19.1 | $43.2 | $54.0 |
| Operating loss | $(2.8) | $(2.4) | $(42.5) | $(10.2) |
| Equity-method earnings | $9.5 | $14.4 | $26.0 | $57.1 |
| Net income (loss) | $5.0 | $3.9 | $(20.7) | $26.4 |
| Diluted EPS | $0.27 | $0.21 | $(1.15) | $1.44 |
| Operating cash flow | Not provided as a quarterly comparison | $34.9 | $47.6 |
Q3 consumables revenue was $15.8 million and cost of revenue was $15.0 million, implying roughly 5.2% gross margin before depreciation and amortization. For the nine-month period, consumables revenue of $33.2 million was below cost of revenue of $33.9 million, implying a negative margin of about 2.1%. The filing attributes pressure to lower volumes and higher fixed cost per pound.
Nine-month cash distributions from equity-method investees were $42.2 million, down from $56.8 million. Cash, cash equivalents and restricted cash totaled $25.0 million at September 30, including $10.0 million of restricted cash; unrestricted cash was $15.0 million. Current assets were $56.2 million versus current liabilities of $40.1 million. Total debt was $29.8 million, including $24.4 million current maturities; the $22.0 million senior term loan principal is due December 2021. The $5.0 million line of credit had no borrowings and matured March 31, 2021.
For the nine months, cash from operations was $34.9 million, investing cash use was $5.6 million and financing cash use was $21.4 million, resulting in a $7.9 million increase in cash and restricted cash. Total assets were $155.7 million and stockholders’ equity was $84.4 million at period-end.
Material changes versus prior period
- Nine-month revenue fell 20%, with consumables down 19% and related-party license royalties down 22%. Management cited lower coal-fired generation, lower sales volumes and less favorable pricing and mix.
- Nine-month equity-method earnings fell 54%, chiefly reflecting lower Tinuum Group earnings. Factors included lower lease payments after customer lease restructuring, higher depreciation, and two utility closures and related facility lease terminations.
- A $26.1 million long-lived-asset impairment was recorded in Q2 2020, primarily for the PGI manufacturing plant and mine-related assets. No additional impairment was recorded in Q3; management cautioned further impairment remains possible if forecasts weaken.
- Nine-month net loss compared with prior-year net income; operating cash flow and investee distributions also declined. Lower interest expense and income tax expense partly offset the weaker operating and equity-method results.
- Cash dividends were $0.25 per share in Q1 2020, with none declared for Q2 or Q3; the comparable 2019 nine-month dividend was $0.75 per share. Nine-month share repurchases were $0.2 million, versus $2.9 million in 2019.
Outlook, transactions and risks
- On September 30, ADES signed a 15-year Cabot supply agreement, with automatic 10-year renewal terms unless notice is given. Management expects incremental volume, manufacturing efficiencies and improved gross margins as new volumes come online; it anticipated positive margin effects beginning in 2021. Cabot will also reimburse certain agreed capital expenditures.
- In connection with the supply agreement, ADES acquired Marshall Mine for a nominal price and began closing and reclaiming it. The recorded asset-retirement obligation was $21.3 million, based on estimated future costs of $23.7 million; Cabot is obligated to reimburse $10.2 million over 13 years. A $30.0 million surety bond was posted, backed by $5.0 million collateral at quarter-end and a further $5.0 million due by March 31, 2021.
- Management estimated future Tinuum cash flows through 2021 at $90–$110 million, inclusive of distributions and royalties and net of specified tax and interest payments. This is conditional on lease renewals, coal generation and other operating assumptions. Management expected lower Tinuum earnings and distributions for the remainder of 2020 and in 2021.
- Section 45 tax credits, a key driver of Tinuum’s business, were expected to expire no later than December 31, 2021. Tinuum had 21 invested facilities at September 30; nine were leased to one customer, and many leases renew periodically. A new facility announced October 20 brought the total to 22 operating invested facilities.
- COVID-19 measures increased costs and caused operating inefficiencies; lower power demand and coal dispatch also pressured product demand. ADES received a $3.3 million PPP loan at 1% interest, potentially forgivable subject to program terms and SBA approval. Management stated that available cash and operating cash flows were expected to meet working-capital and other liquidity needs for at least 12 months, while noting cash needs could rise if conditions worsen.
- Other items include a $1.4 million CEO severance provision following the CEO’s resignation, and a $5.1 million increase in the deferred-tax valuation allowance during the nine months. The filing reports no significant legal proceedings and says disclosure controls were effective.
Important facts for investors to verify
- Confirm that this ADES filing—not an Arq, Inc. filing—is the intended document.
- Track Cabot supply volumes, agreed capital spending, expected margin improvement, and the economics and collections of the Cabot reclamation reimbursement.
- Review Marshall Mine reclamation costs, contingent exposures, the surety collateral schedule and the related long-term cash commitments.
- Assess Tinuum’s customer concentration, lease renewals, facility performance and cash distributions, especially as Section 45 tax credits approach expiration.
- Monitor PGI demand, coal dispatch, product margins and the possibility of further asset impairment; also verify PPP loan forgiveness status and debt repayment and covenant requirements.