Business context and reporting period
This is Advanced Emissions Solutions, Inc. (ADES)’s unaudited Form 10-Q for the quarter ended March 31, 2021, compared with the quarter ended March 31, 2020. The request metadata names Arq, Inc.; the filing itself identifies ADES, so confirm the intended issuer.
ADES operates Advanced Purification Technologies (APT), which sells activated-carbon and related consumables, and Refined Coal (RC), which earns royalties and equity-method income through Tinuum Group and Tinuum Services. The company expects those RC businesses to wind down substantially by the end of 2021 as Section 45 tax credits expire.
Financial performance and position
| Metric | Q1 2021 | Q1 2020 / prior balance |
|---|---|---|
| Consumables revenue | $17.0 million | $9.2 million |
| Related-party license royalties | $4.1 million | $3.0 million |
| Total reported revenue | $21.1 million | $12.3 million |
| Operating income (loss) | $0.3 million | $(8.6) million |
| Equity-method earnings | $18.3 million | $8.3 million |
| Net income (loss) | $13.7 million | $(1.9) million |
| Diluted earnings (loss) per share | $0.75 | $(0.11) |
| Operating cash flow | $21.9 million | $13.2 million |
| Cash, cash equivalents and restricted cash | $52.2 million | $35.9 million at December 31, 2020 |
| Total debt carrying value | $14.2 million | $23.9 million at December 31, 2020 |
Consumables gross margin, calculated from revenue less consumables cost of revenue before depreciation and amortization, was approximately 26.8%, versus approximately negative 24.7% in Q1 2020. Consolidated operating margin was approximately 1.6%; net income was largely driven by equity-method earnings rather than reported revenue. Q1 cash generation included $23.3 million of distributions from equity-method investees, including $5.6 million reported as investing cash flow after Tinuum Group’s investment carrying value reached zero.
At March 31, total cash and restricted cash included $16.0 million of restricted cash, leaving approximately $36.2 million not restricted. Debt included a $6.0 million senior term loan due December 2021, finance leases, and a $3.3 million PPP loan. No line-of-credit borrowings were outstanding; reported availability was $4.7 million.
Material changes versus the prior comparable period
- Revenue rose 72%, mainly from increased consumables volume under the Cabot supply agreement and higher pricing mix; consumables revenue increased $7.8 million, including $7.1 million attributed to Supply Agreement product.
- Operating results improved from an $8.6 million loss to $0.3 million of income. APT segment operating results improved to near break-even, while RC segment operating income increased to $22.3 million from $10.9 million.
- Equity-method earnings more than doubled, principally because Tinuum Group earnings rose to $16.4 million from $6.4 million. The 2021 amount included recognition associated with distributions exceeding the investment carrying value, so it is not solely a measure of the quarter’s proportionate investee income.
- Operating cash flow increased by $8.7 million; investing cash flow was positive, including $5.6 million of distributions in excess of cumulative earnings. Financing cash use included $10.0 million of term-loan principal payments.
- Total debt fell by $9.7 million from year-end 2020. The company paid no dividend in Q1 2021, compared with $4.5 million paid in Q1 2020.
Outlook, commentary, risks and unusual items
- Management expects 2021 cash flows from Tinuum, including distributions and royalties and net of estimated income taxes, of approximately $50–$60 million, subject to stated operating, lease-renewal and power-generation assumptions. It expects Tinuum distributions to substantially cease after 2021.
- Management expects $9.5 million of capital expenditures in 2021, including Supply Agreement-related capital and planned maintenance; it expects annual capital expenditures to average approximately $5.0 million in 2022 and beyond. The Supply Agreement is a 15-year contract with automatic 10-year renewal terms unless notice is provided.
- Management expects APT operations to become the principal liquidity source from 2022 onward. It also expects routine Q2 maintenance and the April plant incident to increase costs and weigh on gross margin.
- On April 22, 2021, a fire in a Red River Plant coal-handling system caused an approximately one-week shutdown. The estimated cash-flow impact, including repairs and lost-production effects, was not expected to exceed $3.0 million.
- ADES assumed Marshall Mine reclamation obligations. The related asset-retirement obligation was $16.1 million at March 31; Cabot is obligated to reimburse $10.2 million of reclamation costs over 13 years. The company posted a $30.0 million surety bond and had $10.0 million of related restricted cash. Total outstanding surety bonds for mine reclamation were $36.7 million.
- The $3.3 million PPP loan forgiveness application was pending; the company stated payments on any unforgiven amount would commence in August 2021. It had deferred $0.4 million of payroll taxes under the CARES Act.
- Retention agreements entered into after quarter-end provide for total payments of $2.4 million, subject to employee-retention conditions. The filing reported no significant legal proceedings and no material risk-factor updates from the 2020 Form 10-K.
- Key risks include the impending RC wind-down, lease renewals or repricing, coal-fired generation and competing energy sources, customer and product concentration, execution of APT growth plans, reclamation obligations, and COVID-19-related disruption. Management reported disclosure controls effective as of March 31, 2021.
Most important facts for investors to verify
- Confirm the intended issuer: this filing is for Advanced Emissions Solutions, Inc. (ADES), not Arq, Inc.
- Track the actual timing and amount of Tinuum wind-down, distributions and royalties, and whether the expected $50–$60 million of 2021 cash flows is achieved.
- Separate recurring operating performance from equity-method earnings, particularly the Q1 2021 earnings recognized after Tinuum Group’s investment balance reached zero.
- Monitor APT volumes, margins, Cabot-related capital reimbursements, and the effects of Q2 maintenance and the plant incident.
- Verify refinancing or repayment of the senior term loan due December 2021, PPP loan forgiveness, liquidity covenant compliance, and the availability of unrestricted cash.
- Follow reclamation spending, Cabot reimbursements, surety collateral requirements, and the $2.4 million retention-agreement payments.