Filing summary: Advanced Emissions Solutions, Inc. (ADES)
Entity note: The supplied filing is ADES’s Form 10-K, not a filing identified as Arq, Inc. It covers the fiscal year ended December 31, 2021, with comparisons to 2020, and was filed March 8, 2022.
Business context and reporting period
ADES sells activated carbon and chemical purification products through its Advanced Purification Technologies (APT) segment. Its Refined Coal (RC) segment principally consisted of equity-method investments in Tinuum Group and Tinuum Services, plus royalties from licensed technology. The federal Section 45 tax-credit program expired December 31, 2021; both Tinuum businesses substantially ceased operations, ending the RC earnings and royalty stream. Management expects APT to be the company’s principal ongoing business.
Key financial results
| Metric | FY 2021 | FY 2020 |
|---|---|---|
| Revenue | $100.3 million | $67.4 million |
| Operating income (loss) | $4.9 million | ($41.0 million) |
| Net income (loss) | $60.4 million | ($20.3 million) |
| Operating cash flow | $26.0 million | $54.0 million |
| Cash, cash equivalents and restricted cash, year-end | $88.8 million | $35.9 million |
| Total debt, primarily finance leases, year-end | $4.2 million | $23.9 million |
Consumables revenue rose 59% to $85.9 million, primarily on higher sales volumes, including Cabot supply-agreement shipments, as well as favorable price and product mix. Consumables gross margin before depreciation and amortization was approximately 23.6% of consumables revenue, versus approximately 5.5% in 2020; higher third-party product purchases partly offset improved volume and pricing. Equity-method earnings increased to $68.7 million from $31.0 million, and related royalties were $14.4 million. These RC contributions drove much of reported earnings: 2021 RC segment operating income was $82.6 million, compared with APT segment operating income of $5.6 million. Net income also included a $3.3 million gain from forgiveness of the PPP loan and a $2.7 million gain from revised mine-reclamation estimates.
Year-end current assets were $108.4 million and current liabilities $22.6 million. The company paid off its senior term loan in June 2021; the bank line of credit expired at year-end. The remaining reported debt was mainly finance lease obligations. FY2021 investing cash flow was $44.4 million, including $51.1 million of distributions from equity-method investees classified as in excess of cumulative earnings. Operating cash flow declined year over year despite higher net income, reflecting lower operating-classified distributions from investees and other noncash and working-capital effects.
Material changes versus 2020
- Revenue increased 49%, while operating results turned positive, in part because 2020 included a $26.1 million APT long-lived-asset impairment charge.
- Equity-method earnings more than doubled, and cash distributions from Tinuum Group and Tinuum Services totaled $74.0 million in 2021. These are not expected to remain a material source of earnings or liquidity after the RC wind-down.
- Cash and restricted cash increased by $52.8 million; total debt fell substantially after senior-loan repayments and payoff.
- The company restated 2020 consumables revenue and cost of revenue upward by $5.8 million each for shipping and handling presentation. The restatement did not affect operating income, net income, EPS, balance sheets or cash flows.
Outlook, risks and unusual items
Management expects 2022 APT consumables revenue and volumes to increase from 2021, while also indicating that demand from current customers may be consistent with 2021 based on market trends. It expects pricing actions and product mix improvements to support margins, but anticipates continued third-party product purchases because of demand and Red River Plant capacity constraints. Management forecast $13.0 million of 2022 capital expenditures and said year-end cash was expected to fund operations for the next 12 months. It also expected $4–5 million of final Tinuum distributions in the first half of 2022.
On February 25, 2022, ADES received $10.6 million from Cabot following a change-in-control provision. The payment included outstanding reclamation reimbursements, amounts related to certain capital expenditures, and additional reclamation costs; ADES is obligated to remit the relevant reclamation-cost amount to the mine operator. The company said it would account for the payment in the first quarter of 2022.
In May 2021, the board began a strategic review; no timetable or outcome was assured. Management said it was unlikely to resume quarterly dividends in the foreseeable future and did not expect near-term share repurchases. Principal risks include the loss of RC earnings and cash distributions, dependence on APT growth, reliance on a single manufacturing plant, customer concentration, coal-market and environmental-regulation uncertainty, raw-material availability and cost, and potential obligations under Tinuum guarantees. The company had $86.1 million of federal tax-credit carryforwards but fully reserved its net deferred tax assets; utilization may be limited by an ownership change.
ADES reported a material weakness in internal control over financial reporting, involving controls over accounting-principle selection, monitoring accounting guidance, and annual policy review. The weakness contributed to the shipping-and-handling presentation error; management said remediation was in progress and expected implementation during the first half of 2022. The auditor issued an unmodified opinion on the financial statements but did not audit internal-control effectiveness.
Most important facts for investors to verify
- How much APT earnings and cash generation can replace RC segment earnings, royalties and distributions that ended with the Section 45 program.
- Whether reported cash includes restrictions sufficient to meet reclamation collateral and other obligations, and how the Cabot payment’s pass-through reclamation component affects usable liquidity.
- APT capacity, third-party supply costs, customer concentration and performance under the long-term Cabot supply agreements.
- Progress and outcome of the strategic review, and any resulting effects on operations, financing or shareholder returns.
- Remediation and testing of the disclosed material weakness, plus developments affecting the availability and use of tax-credit carryforwards.
- Potential costs or liabilities from mine reclamation, surety bonds and Tinuum-related guarantees.