Business context and reporting period
Entity mismatch: The request identifies Arq, Inc., but the supplied Form 10-Q is for Advanced Emissions Solutions, Inc. (ADES), for the quarter ended June 30, 2018. This summary covers the supplied filing.
ADES operates in emissions-control products and services and holds equity investments in refined-coal businesses. Its Refined Coal (RC) segment, primarily through Tinuum Group, generates equity earnings, royalties and Section 45 tax credits; its Emissions Control (EC) segment sells chemicals and equipment. Financial statements are unaudited.
Financial results and liquidity
Amounts below are in millions, except per-share data. Reported results reflect adoption of ASC 606 in 2018; prior periods were not restated.
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $4.3 | $27.3 | $8.2 | $36.5 |
| Operating income (loss) | ($1.6) | $0.0 | ($3.3) | ($1.9) |
| Equity-method earnings | $15.9 | $10.2 | $28.1 | $24.0 |
| Net income | $15.3 | $6.4 | $23.0 | $15.1 |
| Diluted EPS | $0.75 | $0.29 | $1.12 | $0.68 |
Revenue fell 84% in Q2 and 78% for the first half, chiefly because substantial equipment-system sales were completed in 2017. Royalty revenue increased to $3.5 million in Q2 and $6.8 million for the half, while chemical revenue declined. EC segment operating income moved to a loss of $1.4 million in Q2 and $2.3 million for the half, versus profits in the comparable 2017 periods. Chemical testing work had negative gross margin. The filing does not provide a clear consolidated gross-margin figure.
Net income growth reflected higher earnings from equity-method investments and lower income-tax expense, despite operating losses. Tinuum Group equity earnings were $14.5 million in Q2 and $25.5 million for the half. Because cumulative distributions exceeded ADES’s share of cumulative earnings, its Tinuum Group investment carrying value was zero; earnings are recognized only to the extent distributions are received while that balance remains zero.
For the six months, operating cash flow was negative $3.4 million, investing cash flow was positive $24.6 million, and financing cash flow was negative $19.7 million. Cash increased $1.5 million to $32.2 million. Investing cash flow chiefly included $25.5 million of Tinuum Group distributions recorded as exceeding investment basis. Financing included $10.2 million of dividends and $9.1 million of share repurchases.
At June 30, cash was $32.2 million, total assets $84.9 million, total liabilities $4.3 million, and stockholders’ equity $80.6 million. There were no borrowings under the $10 million line of credit; its stated maturity was September 30, 2018. The company declared dividends of $0.25 per share in each of the first two quarters and repurchased 825,418 shares for $9.1 million in the first half.
Material changes and unusual items
- ADES adopted ASC 606 on January 1, 2018, recording a $3.0 million cumulative-effect adjustment that reduced accumulated deficit. The standard changed the timing and presentation of certain equipment and licensing revenue; royalty revenue was reclassified from other income to revenue, with no effect on net income. The filing’s reported Q2 and first-half figures differ from figures adjusted for ASC 606, so comparisons require care.
- Additional RC facilities increased M-45 royalty-bearing production: 8.2 million tons in Q2 2018 versus 4.3 million in Q2 2017; 15.9 million versus 7.7 million for the first half. Management attributed higher royalties and distributions in part to additional third-party investment in facilities.
- Q2 restructuring charges were $0.9 million, related to a workforce reduction and executive departures; six employees were affected. Management expected further charges in Q2 and Q3 depending on termination dates.
- The company paid a previously accrued $1.0 million restorative contribution to its 401(k) plan in June 2018. The DOL investigation was expected to close under the agreement, with no further action against the plan or its fiduciaries.
Outlook, commentary and risks
The filing provides no quantified earnings or revenue guidance. Management said it does not expect future long-term fixed-price ACI or DSI equipment contracts, as compliance deadlines that historically drove demand have passed. It aims to use chemical sales to cover some expenses but noted price compression and customer concentration. Future liquidity and distributions depend on executing contracts, continued Tinuum royalty payments and distributions, and securing additional tax-equity investors for facilities not yet operating.
A key concentration risk is Tinuum Group’s dependence on a single customer: 11 of its 18 invested refined-coal facilities were leased to that customer. Loss of the customer could materially affect Tinuum Group and ADES. Other risks include facility operations and eligibility for Section 45 tax credits, regulatory or market changes affecting coal-fired generation, and the ability to maintain facility leases and attract investors. The company disclosed limited contingent guarantees relating to Tinuum Group, but had not recorded a liability because it considered a loss not probable. Management reported disclosure controls were effective and no material change in internal control during the quarter.
Important facts for investors to verify
- Confirm the issuer: the supplied filing is Advanced Emissions Solutions, Inc., not Arq, Inc.
- Review ASC 606’s effects and distinguish reported results from the filing’s adjusted comparisons, particularly for equipment contracts and royalties.
- Assess the sustainability and cash conversion of Tinuum Group distributions, given the zero carrying value and reliance on cash distributions for recognized earnings.
- Monitor the major Tinuum Group customer, facility leases, operating status, tax-credit qualification and access to additional tax-equity investors.
- Check the line-of-credit renewal or replacement following its September 30, 2018 stated maturity, and subsequent dividends, buybacks and restructuring costs.