Advanced Emissions Solutions(ADES) - 2018 Q4 - Annual Report

Part I Business ADES provides environmental solutions through its Refined Coal (RC) segment, reliant on expiring tax credits, and its Power Generation and Industrials (PGI) segment, which expanded its activated carbon offerings - The company operates two primary segments: Refined Coal (RC), reliant on tax credits expiring by 2021, and Power Generation and Industrials (PGI), focused on activated carbon consumables[5] - ADES acquired Carbon Solutions for $75.0 million on December 7, 2018, expanding its activated carbon market offerings, primarily funded by a $70.0 million senior term loan[6] Revenue by Type (2017-2018) | Revenue Type | 2018 (in thousands) | 2017 (in thousands) | | :--- | :--- | :--- | | Consumables | $8,733 | $4,246 | | License royalties, related party | $15,140 | $9,672 | | Equipment sales | $72 | $31,446 | | Total revenues | $23,945 | $45,364 | - Business is heavily influenced by environmental regulations like the Mercury and Air Toxics Standards (MATS), driving demand for pollutant control products[9][26] Tinuum Group RC Facility Status (as of Dec 31, 2018) | Status | Number of RC Facilities | | :--- | :--- | | Total Facilities | 28 | | Not Operating | 9 | | Operating (Invested) | 19 | | Operating (Retained) | 0 | - Section 45 tax credits, a key driver for the RC segment, expire in December 2019 for two facilities and in 2021 for the remaining facilities[13] Risk Factors The company faces substantial risks from dependence on environmental regulations, declining coal use, expiration of Section 45 tax credits by 2021, integration of the Carbon Solutions acquisition, and potential limitations on tax loss carryforwards - Demand for products is highly dependent on environmental laws like MATS, and changes to these regulations could materially harm the business[49] - A substantial portion of earnings from the Refined Coal (RC) segment will be eliminated after 2021 due to the expiration of Section 45 tax credits, which the PGI segment may not sufficiently replace[77][78][79] - The company faces risks in integrating the Carbon Solutions acquisition, including assimilating operations, retaining customers and employees, and realizing expected synergies[65][66][67] - An "ownership change" under IRC Section 382 could significantly limit the company's ability to use its $104.6 million in tax loss and credit carryforwards[98][99] - Covenants in the Senior Term Loan may prevent the company from paying dividends or repurchasing stock starting in Q3 2020, as future net cash flows from the RC business are expected to fall below the required $100 million threshold[109] - A significant portion of Tinuum Group's earnings comes from related tax equity investors, and renegotiation or termination of these leases would materially and adversely affect the business[82][83] Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - There are no unresolved staff comments[116] Properties The company operates through leased corporate facilities in Colorado and owned/leased manufacturing and mining properties in Louisiana, including an activated carbon plant and lignite mine - The company leases office, warehouse, and laboratory space in Colorado totaling approximately 32,000 square feet[117] - The company owns or controls approximately 1,750 acres of coal land for its Five Forks surface mine in Louisiana, supplying raw material for its activated carbon plant[118] Legal Proceedings The company is involved in various litigation matters arising in the ordinary course of business, with details in Note 8 of the financial statements - Information regarding legal proceedings is found in Note 8, "Commitments and Contingencies," of the financial statements[122] Mine Safety Disclosures Mine safety violation disclosures, as required by the Dodd-Frank Act, are included in Exhibit 95 of the Form 10-K - The statement concerning mine safety violations is included in Exhibit 95 to this report[123] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on NASDAQ, with a quarterly dividend program and active stock repurchases, including a new $20.0 million program authorized in November 2018 - The company commenced a quarterly cash dividend program of $0.25 per common share in June 2017[126] Common Stock Repurchase Activity (Q4 2018) | Period | Total Shares Purchased | Average Price Paid per Share | Approx. Dollar Value Remaining (in thousands) | | :--- | :--- | :--- | :--- | | Oct 1-31, 2018 | — | $— | $— | | Nov 1-30, 2018 | 145,688 | $10.13 | — | | Dec 1-31, 2018 | 1,193,104 | $10.34 | $5,826 | | Total | 1,338,792 | | $5,826 | - In November 2018, the Board authorized a new stock repurchase program for up to $20.0 million of common stock, effective until December 31, 2019[131] Selected Financial Data This section provides a five-year financial summary, highlighting 2018 revenues of $23.9 million (down from $45.4 million in 2017) and net income of $35.5 million, boosted by $54.2 million in equity method earnings Five-Year Selected Financial Data Summary (2014-2018) | (in thousands, except per share) | 2018 | 2017 | 2016 | 2015 | 2014 | | :--- | :--- | :--- | :--- | :--- | :--- | | Statement of Operations Data | | | | | | | Revenues | $23,945 | $45,364 | $56,747 | $73,381 | $23,333 | | Earnings from equity method investments | $54,208 | $53,843 | $45,584 | $8,921 | $42,712 | | Net income (loss) | $35,454 | $27,873 | $97,678 | $(30,141) | $1,387 | | Net income (loss), per share, basic | $1.78 | $1.30 | $4.40 | $(1.37) | $0.06 | | Dividends declared per common share | $1.00 | $0.75 | $— | $— | $— | | Balance Sheet Data (as of Dec 31) | | | | | | | Total assets | $159,664 | $82,618 | $107,296 | $60,775 | $93,699 | | Total borrowings | $74,125 | $— | $— | $28,025 | $15,910 | | Stockholders' equity (deficit) | $67,947 | $73,455 | $76,165 | $(24,978) | $(697) | - The Carbon Solutions Acquisition on December 7, 2018, contributed $5.6 million in revenues and a net loss of $0.4 million for the period from December 7 to December 31, 2018[136] - In 2018, the company entered into a $70.0 million senior term loan facility to fund the Carbon Solutions Acquisition, significantly increasing total borrowings[136] Management's Discussion and Analysis of Financial Condition and Results of Operations In 2018, total revenue decreased by 47% to $23.9 million due to completed equipment sales, offset by increased royalties and consumables, while net income rose to $35.5 million driven by equity method earnings and significant capital returns Results of Operations Total revenue decreased 47% to $23.9 million in 2018 due to completed equipment sales, partially offset by increased royalties and consumables, leading to a wider operating loss but strong pre-tax income from equity method earnings Consolidated Revenue Comparison (2017-2018) | Revenue Type | 2018 (in thousands) | 2017 (in thousands) | Change ($ in thousands) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Consumables | $8,733 | $4,246 | $4,487 | 106% | | License royalties, related party | $15,140 | $9,672 | $5,468 | 57% | | Equipment sales | $72 | $31,446 | $(31,374) | (100)% | | Total revenues | $23,945 | $45,364 | $(21,419) | (47)% | - Equipment sales revenue decreased by $31.4 million as all long-term ACI and DSI system contracts were completed by the end of 2017, with no similar future contracts expected[148][150] - Consumables revenue increased by 106%, primarily due to the Carbon Solutions Acquisition, which contributed $5.6 million in revenue from December 7 to December 31, 2018[147] - Legal and professional fees increased by 89% to $8.2 million, mainly due to $4.5 million in costs related to the Carbon Solutions Acquisition[153][155] - Earnings from equity method investments remained stable at approximately $54 million, with Tinuum Services earnings increasing by $2.1 million (42%) due to more RC facilities in operation[157][158] - The company earned $7.0 million in Section 45 tax credits in 2018, up from $3.5 million in 2017, from the operation of retained RC facilities[163] Business Segments The RC segment's operating income increased to $65.5 million in 2018, while the PGI segment reported an operating loss of $2.6 million due to declining equipment sales not offset by new consumables revenue Segment Operating Income (Loss) Comparison (2017-2018) | Segment | 2018 (in thousands) | 2017 (in thousands) | Change ($ in thousands) | | :--- | :--- | :--- | :--- | | Refined Coal | $65,454 | $59,908 | $5,546 | | Power Generation and Industrials | $(2,621) | $379 | $(3,000) | | Total segment operating income | $62,833 | $60,287 | $2,546 | - The RC segment's operating income increased by $5.5 million, driven by higher M-45 royalties, increased earnings from Tinuum Services, and lower 453A interest expense[175][177] - The PGI segment's operating income decreased by $3.0 million, swinging to a loss, primarily due to the sharp decline in equipment sales revenue not offset by incremental revenue from the Carbon Solutions acquisition[175][178] Liquidity and Capital Resources The company's 2018 liquidity was impacted by the $65.8 million Carbon Solutions acquisition, funded by a $70.0 million Senior Term Loan, alongside significant capital returns and projected $200-225 million in future Tinuum cash flows Summary of Cash Flows (2017-2018) | (in thousands) | 2018 | 2017 | | :--- | :--- | :--- | | Net cash used in operating activities | $(9,889) | $(11,748) | | Net cash (used in) provided by investing activities | $(16,543) | $48,386 | | Net cash provided by (used in) financing activities | $19,511 | $(32,889) | | Net change in Cash | $(6,921) | $3,749 | - The company executed a $70.0 million Senior Term Loan with Apollo to primarily fund the Carbon Solutions Acquisition, receiving net proceeds of $67.9 million after discounts and paying $2.0 million in issuance costs[185][196] - Investing activities were dominated by the $62.5 million net cash used for the Carbon Solutions acquisition, a sharp contrast to 2017 which saw $48.9 million in cash distributions from Tinuum Group classified as investing cash flow[194][195] - The company returned significant capital to shareholders, paying $20.2 million in dividends and using $25.3 million for stock repurchases during 2018[187][188][197][198] - Future cash flows from Tinuum (distributions and royalties, net of taxes) are expected to range from $200 million to $225 million through 2021[183] Contractual Obligations As of December 31, 2018, total contractual obligations were $87.7 million, primarily comprising a $70.0 million Senior Term Note and significant capital and operating lease obligations Contractual Obligations as of December 31, 2018 | (in thousands) | Total | Less than 1 year | 1-3 years | 4-5 years | After 5 years | | :--- | :--- | :--- | :--- | :--- | :--- | | Senior Term Note | $70,000 | $24,000 | $46,000 | $— | $— | | Capital lease obligations | $9,642 | $1,749 | $3,509 | $1,902 | $2,482 | | Operating leases | $8,055 | $3,619 | $3,905 | $531 | $— | | Total | $87,697 | $29,368 | $53,414 | $2,433 | $2,482 | Critical Accounting Policies and Estimates Critical accounting policies involve significant management judgments and estimates, particularly in business combinations, income taxes, and asset retirement obligations - Business Combinations: Allocating the purchase price of acquisitions like Carbon Solutions requires significant estimates for the fair value of tangible and intangible assets, such as customer relationships and developed technology[204] - Income Taxes: Management judgment is critical in determining the valuation allowance for deferred tax assets, assessing if they are "more likely than not" to be realized[209] - Asset Retirement Obligation: The company must estimate future costs to reclaim its mine assets, involving judgments about timing, amount, and scope of reclamation work required by regulations[208] Financial Statements and Supplementary Data This section presents the company's audited consolidated financial statements for 2018 and 2017, including key figures like $159.7 million in total assets and $35.5 million in net income, with an unqualified opinion from Moss Adams LLP - The financial statements were audited by Moss Adams LLP, which provided an unqualified opinion on both the financial statements and the company's internal control over financial reporting[214][215] - The company adopted the new revenue recognition standard, ASC 606, on January 1, 2018, using the modified retrospective method, resulting in a cumulative-effect adjustment increasing retained earnings by $3.0 million[216][226] Consolidated Balance Sheet Summary | (in thousands) | As of Dec 31, 2018 | As of Dec 31, 2017 | | :--- | :--- | :--- | | Total current assets | $59,776 | $36,888 | | Total Assets | $159,664 | $82,618 | | Total current liabilities | $40,719 | $6,878 | | Total Liabilities | $91,717 | $9,163 | | Total Stockholders' Equity | $67,947 | $73,455 | Consolidated Statement of Operations Summary | (in thousands, except per share) | Year Ended Dec 31, 2018 | Year Ended Dec 31, 2017 | | :--- | :--- | :--- | | Total revenues | $23,945 | $45,364 | | Operating loss | $(6,400) | $(4,142) | | Earnings from equity method investments | $54,208 | $53,843 | | Net income | $35,454 | $27,873 | | Diluted EPS | $1.76 | $1.29 | Tinuum Group, LLC and Subsidiaries Consolidated Financial Statements Audited financial statements for Tinuum Group, a key equity investee, show total revenues of $615.1 million and net income of $135.8 million in 2018, reflecting significant growth Tinuum Group - Consolidated Statement of Operations Summary | (in thousands) | 2018 | 2017 | | :--- | :--- | :--- | | Total Revenues | $615,060 | $393,397 | | Gross Profit | $107,135 | $95,552 | | Income from Operations | $83,473 | $72,594 | | Net Income Available to Class A and B Members | $135,800 | $109,836 | Tinuum Group - Consolidated Balance Sheet Summary | (in thousands) | As of Dec 31, 2018 | As of Dec 31, 2017 | | :--- | :--- | :--- | | Total current assets | $54,958 | $31,605 | | Total Assets | $147,949 | $106,660 | | Total current liabilities | $50,908 | $48,280 | | Total Liabilities | $65,354 | $56,630 | | Total Members' Equity | $82,595 | $49,209 | - As of December 31, 2018, Tinuum had 19 REF facilities sold to or under lease with third-party investors, up from 17 in the prior year[412] - In January 2019, subsequent to the reporting period, Tinuum Group completed a transaction for an additional RC facility, bringing the total number of invested facilities to 20[361][467] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None reported[364] Controls and Procedures Management concluded disclosure controls and internal control over financial reporting were effective as of December 31, 2018, though the assessment excluded the Carbon Solutions acquisition, which represented 54% of total assets - Management concluded that disclosure controls and procedures were effective as of December 31, 2018[365] - The assessment of internal control over financial reporting as of December 31, 2018, excluded the newly acquired Carbon Solutions[366][373] - Carbon Solutions represented 54% of consolidated total assets and 23% of consolidated revenues for the year ended December 31, 2018[366][373] Other Information The company reports no other information for this item - None reported[377] Part III Directors, Executive Officers and Corporate Governance Information regarding directors, executive officers, and corporate governance is incorporated by reference from the definitive proxy statement - Information is incorporated by reference from the definitive proxy statement[377] Executive Compensation Information regarding executive compensation is incorporated by reference from the definitive proxy statement - Information is incorporated by reference from the definitive proxy statement[378] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Security ownership information is incorporated by reference, with 549,780 securities issuable under approved equity compensation plans as of December 31, 2018 Equity Compensation Plan Information as of December 31, 2018 | Plan Category | Number of securities to be issued upon exercise | Weighted-average exercise price | Number of securities remaining available for future issuance | | :--- | :--- | :--- | :--- | | Equity compensation plans approved by security holders | 549,780 | $12.23 | 2,376,111 | | Equity compensation plans not approved by security holders | — | $— | — | | Total | 549,780 | | 2,376,111 | Certain Relationships and Related Transaction and Director Independence Information regarding related party transactions and director independence is incorporated by reference from the definitive proxy statement - Information is incorporated by reference from the definitive proxy statement[382] Principal Accountant Fees and Services Information regarding principal accountant fees and services is incorporated by reference from the definitive proxy statement - Information is incorporated by reference from the definitive proxy statement[383] Part IV Exhibits and Financial Statement Schedules This section lists all financial statements, schedules, and exhibits filed as part of the Form 10-K, including the audited consolidated financial statements of Tinuum Group, LLC - All financial statement schedules are omitted because the required information is not applicable or is included in the Consolidated Financial Statements and Notes[385] - The report includes the consolidated financial statements of Tinuum Group, LLC and its subsidiaries for the years ended December 31, 2018 and 2017, as required by SEC Rule 3-09[392] - Key exhibits filed include the Tax Asset Protection Plan, the Term Loan and Security Agreement with Apollo, and various amendments to the Line of Credit with CoBiz Bank[386][388]