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Operations
38: R5 Condensed Consolidated & Combined Statements of HTML 93K
Stockholders' and Members' Equity
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Cash Flows
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Registrant’s telephone number, including area code: (502) 245-1353
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol
Name
of each exchange on which registered
Common Stock, par value $0.01 per share
CHRA
New York Stock Exchange
____________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No ¨
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,”“accelerated filer,”“smaller reporting company,” and “emerging growth company” in Rule 12b‑2 of the Exchange Act.
Large accelerated filer ¨
Accelerated filer ¨
Non-accelerated
filer x
Smaller reporting company ¨
Emerging growth company x
If an emerging growth company, indicate by check mark if the
registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b‑2 of the Exchange Act). Yes ¨ No x
The information in this Quarterly Report on Form 10‑Q (this “Quarterly Report”) includes “forward‑looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements, other than statements of historical fact included in this Quarterly Report, regarding our strategy, future operations, financial position, estimated revenue and losses, projected costs, prospects, plans and objectives of management are forward‑looking statements. When used in this Quarterly Report, the words “could,”“believe,”“anticipate,”“intend,”“estimate,”“expect,”“project” and similar expressions are intended to identify forward‑looking statements, although not all forward‑looking
statements contain such identifying words. When considering forward‑looking statements, you should keep in mind the risk factors and other cautionary statements included in Part I, “Item 1A. Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2018 and in Part II, “Item 1A. Risk Factors” of this Quarterly Report and elsewhere herein. These forward‑looking statements are based on management’s current belief, based on currently available information, as to the outcome and timing of future events.
Forward‑looking statements may include statements about:
•
our business strategy;
•
our
operating cash flows, the availability of capital and our liquidity;
•
our future revenue, income and operating performance;
•
our ability to sustain and improve our utilization, revenue and margins;
•
our ability to maintain acceptable pricing for our services;
•
our
future capital expenditures;
•
our ability to finance equipment, working capital and capital expenditures;
•
competition and government regulations;
•
our ability to obtain permits and governmental approvals;
•
pending
legal or environmental matters or liabilities;
•
environmental hazards;
•
industrial accidents;
•
business or asset acquisitions;
•
general
economic conditions;
•
credit markets;
•
our ability to successfully develop our research and technology capabilities and to implement technological developments and enhancements;
•
uncertainty regarding our future operating results; and
•
plans,
objectives, expectations and intentions contained in this Quarterly Report that are not historical.
We caution you that these forward‑looking statements are subject to all of the risks and uncertainties, most of which are difficult to predict and many of which are beyond our control. These risks include, but are not limited to, the risks described under Part I, “Item 1A. Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2018 and under Part II, “Item 1A. Risk Factors” of this Quarterly Report and elsewhere herein. Should one or more of the risks or uncertainties described occur, or should underlying assumptions prove incorrect, our actual results and plans could differ materially from those expressed in any forward‑looking statements.
All forward‑looking
statements, expressed or implied, included in this Quarterly Report are expressly qualified in their entirety by this cautionary note. This cautionary note should also be considered in connection with any subsequent written or oral forward‑looking statements that we or persons acting on our behalf may issue. Except as otherwise required by applicable law, we disclaim any duty to update any forward‑looking statements, all of which are expressly qualified by the statements in this cautionary note, to reflect events or circumstances after the date of this Quarterly Report.
Billings
in excess of costs and estimated earnings
393
1,352
Notes payable, current maturities
60,565
23,268
Accrued payroll and bonuses
23,373
15,480
Asset
retirement obligation, current portion
13,738
14,704
Purchase option liability
7,110
10,017
Accrued expenses
20,735
22,473
Other
liabilities
1,207
—
Total current liabilities
156,696
112,115
Long-term liabilities:
Contingent
payments for acquisitions
11,417
11,214
Asset retirement obligation, less current portion
4,029
11,361
Line of credit
10,215
19,799
Notes
payable, less current maturities
128,550
211,022
Total liabilities
310,907
365,511
Commitments and contingencies (see Note 11)
Stockholders’
equity:
Retained (losses) earnings
(14,744
)
9,414
Common Stock, $0.01 par value; 200,000,000 shares authorized; 29,622,835 and 29,082,988 shares issued and outstanding as of September 30, 2019 and December
31, 2018, respectively
296
291
Additional paid-in capital
84,340
82,880
Total stockholders’ equity
69,892
92,585
Non-controlling
interest
1,033
805
Total equity
70,925
93,390
Total liabilities and equity
$
381,832
$
458,901
See
accompanying notes to condensed consolidated & combined financial statements.
2
CHARAH SOLUTIONS, INC.
Condensed Consolidated & Combined Statements of Operations
Net cash (used in) provided by financing activities
(57,489
)
15,886
Net
increase (decrease) in cash
686
(28,283
)
Cash, beginning of period
6,900
32,264
Cash, end of period
$
7,586
$
3,981
Supplemental
disclosures of cash flow information:
Cash paid during the year for interest
$
8,562
$
19,244
Cash paid during the year for taxes
$
91
$
—
Non-cash
investing and financing transactions
During the nine months ended September 30, 2019 and 2018, the Company purchased equipment with seller-provided financing of $0 and $13,441, respectively.
See accompanying notes to condensed consolidated & combined financial statements.
7
CHARAH
SOLUTIONS, INC.
Notes to Condensed Consolidated & Combined Financial Statements
(dollars in thousands except per share and unit data)
(Unaudited)
1. Nature of Business and Basis of Presentation
Organization
Charah Solutions, Inc. (together with its subsidiaries, “Charah Solutions,” the “Company,”“we,”“us” or “our”) was formed as a Delaware corporation in January 2018 and did not conduct any material business operations prior to the reorganization transactions
described below other than certain activities related to the initial public offering (the “IPO”), which was completed on June 18, 2018. Charah Solutions is a holding company, the sole material assets of which consist of membership interests in Charah Management LLC, a Delaware limited liability company (“Charah Management”), and Allied Power Holdings, LLC, a Delaware limited liability company (“Allied Power Holdings”). Through the Company’s ownership of Charah Management and Allied Power Holdings, the Company owns the outstanding equity interests in Charah, LLC, a Kentucky limited liability company (“Charah”), and Allied Power Management, LLC, a Delaware limited liability company (“Allied”), the subsidiaries
through which Charah Solutions operates its businesses. The historical financial data presented herein as of September 30, 2019 and December 31, 2018 and for the periods after the June 18, 2018 corporate reorganization described below is that of Charah and Allied on a consolidated basis, and is on a combined basis for the periods prior to the June 18, 2018 corporate reorganization.
Corporate Reorganization
On June 18, 2018, pursuant to the terms of the reorganization transactions completed in connection with the IPO, (i) (a)
Charah Holdings LP, a Delaware limited partnership (“Charah Holdings”) owned by Bernhard Capital Partners Management, LP and certain related affiliates (“BCP”), contributed all of its interests in Charah Management and Allied Power Holdings to the Company in exchange for 17,514,745 shares of common stock, (b) CEP Holdings, Inc., a Delaware corporation owned by Charles E. Price and certain affiliates, contributed all of its interests in Charah Management and Allied Power Holdings to the Company in exchange for 4,605,465 shares of common stock, (c) Charah Management Holdings LLC, a Delaware limited liability company (“Charah Management Holdings”), contributed all of its interests in Charah
Management and Allied Power Holdings to the Company in exchange for 907,113 shares of common stock and (d) Allied Management Holdings, LLC, a Delaware limited liability company (“Allied Management Holdings”), contributed all of its interests in Charah Management and Allied Power Holdings to the Company in exchange for 409,075 shares of common stock; (ii) each of Charah Management Holdings and Allied Management Holdings distributed the shares of common stock received by them pursuant to clause (i) above to their respective members in accordance with the respective terms of their limited liability company agreements; and (iii) Charah Holdings distributed a portion of the shares of common stock it received
in clause (i) above to certain direct and indirect blocker entities which ultimately merged into the Company, with the Company surviving, and affiliates of BCP received shares of common stock as consideration in the mergers.
Description of Business Operations
The Company is a leading provider of mission-critical environmental and maintenance services to the power generation industry, enabling our customers to address challenges related to the remediation of ash ponds and landfills at open and closed power plant sites while continuously operating and providing necessary electric power to communities nationwide.
We offer a suite of coal ash management and recycling, environmental remediation and outage maintenance services. The Company also designs and implements solutions for complex environmental projects (such as coal ash pond closures) and facilitates coal ash recycling through byproduct sales and other beneficial use services. The Company has corporate offices in Kentucky, Louisiana and North Carolina, and principally operates in the eastern and mid-central United States.
Under the Jumpstart Our Business Startups Act (the “JOBS Act”), the Company meets the definition of an “emerging growth company,” which allows the
Company to have an extended transition period for complying with new or revised financial accounting standards pursuant to Section 107(b) of the JOBS Act. The Company intends to take advantage of all of the reduced reporting requirements and exemptions, including the longer phase-in periods for the adoption of new or revised financial accounting standards under Section 107 of the JOBS Act until the Company is no longer an emerging growth company. Among other things, we are not required to provide an auditor attestation report on the assessment of the internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act of 2002 and our disclosure obligations regarding executive compensation may be reduced. We may take advantage of these provisions until the last day of our fiscal
year following the fifth anniversary of the IPO, or December 31, 2023. However, if certain events occur prior to the end of such five-year period, including if we become a “large accelerated filer,” our annual gross revenue exceeds $1.07 billion or we issue more than $1.0 billion of non-convertible debt in any three-year period, we will cease to be an emerging growth company prior to the end of such five-year period.
8
CHARAH SOLUTIONS, INC.
Notes to Condensed Consolidated & Combined Financial Statements, continued
(dollars in thousands except per share and unit data)
(Unaudited)
Basis
for Presentation
The Company’s fiscal year ends December 31. The accompanying unaudited condensed consolidated and combined financial statements include the assets, liabilities, stockholders’ and members’ equity, and results of operations of the Company and its consolidated and combined subsidiaries. Intercompany transactions and balances have been eliminated in consolidation.
The accompanying unaudited condensed consolidated and combined financial statements have been prepared in accordance with rules and regulations of the Securities and Exchange Commission for quarterly reports on Form 10-Q. In the opinion of management,
all adjustments considered necessary for a fair presentation have been included, which consist of normal recurring adjustments. Certain information and footnote disclosures normally included in the annual financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted. The accompanying unaudited condensed consolidated and combined financial statements should be read in conjunction with the audited consolidated and combined financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2018.
Unaudited Pro Forma Income Information
The unaudited pro forma income information gives effect to the corporate reorganization that occurred in connection with the closing of the IPO and the resulting
legal entity of Charah Solutions, which is incorporated as a “C” corporation. Prior to the corporate reorganization, the holding companies for Charah and Allied were limited liability companies and generally not subject to income taxes. The pro forma net income, therefore, includes an adjustment for income tax expense as if the holding companies for Charah and Allied had been “C” corporations for all periods presented at an assumed combined federal, state and local effective income tax rate of 25% for the periods from January 1, 2018 through June 17, 2018, plus the actual tax expense for the periods after June 18, 2018. These rates approximate the calculated statutory tax rate for each period.
Related
Party Transactions
The Company rents their corporate office, housing at work sites and a condo from Price Real Estate, LLC (“Price Real Estate”), an entity owned by a stockholder of the Company. The lease for the corporate office is a triple net lease through May 31, 2020, requiring monthly payments of $39 as of September 30, 2019, increasing by the consumer price index each year on June 1. Other property is rented on a month-to-month basis. Rental expense was $117 and $116
during the three months ended September 30, 2019 and 2018, respectively, and $349 and $342 during the nine months ended September 30, 2019 and 2018, respectively. The Company had no receivables outstanding from Price Real Estate and no
payables due to Price Real Estate as of September 30, 2019 and December 31, 2018.
Brown & Root Industrial Services, LLC (“B&R”), an entity 50% owned by BCP, our majority stockholder, provided subcontracted construction services at one of our remediation and compliance service sites. Expenses to B&R were $0 and $4,125 during the three months ended September 30, 2019 and 2018,
respectively, and $1,311 and $12,750 during the nine months ended September 30, 2019 and 2018, respectively. The Company had no receivables outstanding from B&R as of September 30, 2019 and December 31, 2018. The Company had payables,
net of credit memos, due to B&R of $1,419 and $4,919 as of September 30, 2019 and December 31, 2018, respectively.
2. Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606), requiring an entity to recognize the amount of revenue
to which it expects to be entitled for the transfer of promised goods or services to customers. The core principle of Accounting Standards Codification (“ASC”) Topic 606 is to recognize revenue when a customer obtains control of a good or service, in an amount that reflects the consideration to which an entity is expected to be entitled for those goods or services. Additionally, this ASU requires enhanced qualitative and quantitative disclosures regarding customer contracts. This ASU will replace most existing revenue recognition guidance in GAAP when it becomes effective and permits the use of either a full retrospective transition method or a modified retrospective with cumulative effect transition method.
To assess the impact of this ASU, we utilized internal resources to lead the implementation effort and supplemented them
with external resources. The Company’s adoption activities were performed over three phases: (i) assessment, (ii) design and (iii) implementation using a cross-functional team that included accounting, operational and information technology personnel.
Based on our work to date, we believe we have identified all material contract types, revenue and costs that may be impacted by implementing ASC Topic 606. Generally, the Company believes the majority of its contracts will have similar
9
CHARAH
SOLUTIONS, INC.
Notes to Condensed Consolidated & Combined Financial Statements, continued
(dollars in thousands except per share and unit data)
(Unaudited)
performance obligations under ASC Topic 606 as compared with the units of account previously identified. We have identified certain contracts where the timing of revenue recognition will change under ASC Topic 606. Prior to the adoption of ASC Topic 606, revenue recorded for certain contracts with fluctuating rates per unit matched the amount that was billed to the customer. In accordance
with ASC Topic 606, for contracts with fluctuating rates per unit that are not directly related to changes in the Company’s effort to perform under the contract, the Company will recognize revenue based on the stand-alone selling price per unit, calculated as the average rate per unit over the term of those contractual rates. This accounting treatment will at times create a contract asset or liability for the difference between the revenue recognized and the amount billable/billed to the customer.
As
a calendar year-end emerging growth company that has elected to take advantage of the extended transition period for complying with new or revised financial accounting standards, we are required to adopt the new revenue standard for annual periods beginning on January 1, 2019, and for interim periods within annual periods beginning on January 1, 2020. Accordingly, the interim periods within the year ending December 31, 2019 will be reported under the existing revenue standard, ASC Topic 605, while the annual period for the year ending December 31, 2019 will be reported under ASC Topic 606. For the annual period for the year ending December 31, 2019, we will apply the requirements
of ASC Topic 606 to all contracts using the modified retrospective with cumulative effect transition method. Accordingly, we will recognize the cumulative effect of initially applying the new revenue standard as an adjustment to the opening balance of retained earnings for the year ending December 31, 2019. The comparative information will not be restated and will continue to be reported under the accounting standards in effect for the comparative periods. Based upon our assessment of the impact of the adoption of ASC Topic 606, we estimate a decrease of approximately $300 to the opening balance of retained earnings as of January 1, 2019, with an associated decrease in the contract
asset balance “costs and estimated earnings in excess of billings.”
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), requiring all leases to be recognized on the balance sheet as a right-of-use asset and a lease liability, unless the lease is a short-term lease (generally a lease with a term of 12 months or less). At the commencement date of the lease, the Company will recognize: (i) a lease liability for the Company’s obligation to make payments under the lease agreement, measured on a discounted basis; and (ii) a right-of-use asset that represents the Company’s right to use, or control the use
of, the specified asset for the lease term. This ASU originally required recognition and measurement of leases at the beginning of the earliest period presented using a modified retrospective transition method. In July 2018, the FASB issued ASU No. 2018-11, which provided an additional (and optional) transition method that permits application of this ASU at the adoption date with recognition of a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. In October 2019, the FASB delayed the effective date of this ASU, extending the effective date for non-public business entities and making the ASU effective for the Company for the fiscal year ending December 31, 2021, and interim periods within the fiscal year ending December 31, 2022, with
early adoption permitted. The Company has not yet selected a transition method and is currently evaluating the effect that the adoption of this ASU will have on its consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments — Credit Losses (Topic 326) — Measurement of Credit Losses on Financial Instruments, which introduces a new model for recognizing credit losses on financial instruments based on an estimate of current expected credit losses. The new model will apply to: (1) loans, accounts receivable, trade receivables, and other financial assets measured at amortized cost, (2) loan commitments and certain other off-balance sheet credit exposures, (3) debt securities and other financial assets measured at fair value through
other comprehensive income, and (4) beneficial interests in securitized financial assets. The amendments contained in this ASU will be applied through a modified retrospective approach through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. In November 2018, the FASB issued ASU No. 2018-19, which amended the effective date of ASU No. 2016-13 and clarified that receivables arising from operating leases are not within the scope of Subtopic 326-20. In October 2019, the FASB delayed the effective date of this ASU, extending the effective date for non-public business entities and making the ASU effective for the Company for the fiscal year ending December 31, 2023, and interim periods therein, with early adoption permitted. The
Company is currently evaluating the effect that the adoption of this ASU will have on its consolidated financial statements.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments. This ASU addresses specific cash flow issues, including debt prepayment or debt extinguishment costs, contingent consideration payments made after a business combination, and proceeds from the settlement of insurance claims. This ASU is effective for the Company for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. The
Company is currently evaluating the effect that the adoption of this ASU will have on its consolidated financial statements.
10
CHARAH SOLUTIONS, INC.
Notes to Condensed Consolidated & Combined Financial Statements, continued
(dollars in thousands except per share and unit data)
(Unaudited)
In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230). This ASU requires that a statement of cash flows explains the change during the period in the total of cash,
cash equivalents and amounts generally described as restricted cash or restricted cash equivalents. Upon adopting this ASU, amounts generally described as restricted cash or restricted cash equivalents will be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the consolidated statement of cash flows. ASU No. 2016-18 is effective for the Company for interim and annual periods beginning after December 15, 2018. The Company adopted ASU No. 2016-18 effective January 1, 2019, with retrospective application to our consolidated and combined statements of cash flows so that the consolidated and combined statements of cash flows present
a reconciliation of the changes in cash and cash equivalents and restricted cash. The adoption of this ASU did not have a material impact on our consolidated financial statements. As a result of this retrospective adoption, the amount of cash and cash equivalents previously presented in the consolidated and combined statements of cash flows increased by $3,358 to reflect the inclusion of restricted cash in the amount reported for changes in cash, cash equivalents and restricted cash as of the beginning and end of the period for the period from January 1, 2017 through January 12, 2017 and as of the beginning of the period for the period from January 13, 2017 through December 31, 2017.
In
January 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. This ASU simplifies the measurement of goodwill impairment by eliminating the requirement that an entity compute the implied fair value of goodwill based on the fair values of its assets and liabilities to measure impairment. Instead, goodwill impairment will be measured as the difference between the fair value of the reporting unit and the carrying value of the reporting unit. This ASU also clarifies the treatment of the income tax effect of tax-deductible goodwill when measuring goodwill impairment loss. In October 2019, the FASB delayed the effective date for implementation of ASU No.2017-04. The Company will be required to adopt ASU No. 2017-04 for annual and any interim impairment tests for the
periods beginning after January 1, 2023. ASU No. 2017-04 must be applied prospectively, with early adoption permitted. The Company is currently evaluating the effect that the adoption of this ASU will have on its consolidated financial statements.
3. Business Combination
On March 30, 2018, Charah Management completed a transaction with SCB Materials International, Inc. and affiliated entities (“SCB”), a previously unrelated third party, pursuant to which Charah Solutions acquired certain assets and liabilities of SCB for a purchase price of $35,000, with $20,000
paid at closing and $15,000 to be paid over time in conjunction with certain performance metrics. The contract also contained various mechanisms for a working capital true-up. The acquisition was accounted for under the acquisition method of accounting in accordance with ASC Topic 805, Business Combinations. The allocation of the purchase price for the acquisition was finalized as of March 31, 2019 (as summarized below) with the recognized goodwill allocated to the Environmental Solutions segment. The total amount of goodwill deductible for tax purposes is $2,025.
In November 2018, the $15,000 to be paid
over time was reduced by $3,300. The present value of the future payments using a discount rate of 2.50% was determined to be $11,014. The Company expects the future payments to occur in 2020 and beyond. The allocation of the purchase price for the acquisition is as follows:
Cash acquired
$
17
Net
working capital, excluding cash
21,255
Property, plant and equipment
5,300
Trade name intangible assets
694
Customer relationship intangible assets
742
Technology
1,972
Non-compete
and other agreements
289
Goodwill
745
Total purchase price
$
31,014
Revenue of $14,890 and $31,463, respectively, and earnings of $368 and $1,322,
respectively, from the acquired business were included in the unaudited condensed consolidated and combined statements of operations for the three and nine months ended September 30, 2018.
The following unaudited information presents the pro forma consolidated revenue and net loss for the nine months ended September 30, 2018 as if the acquisition had been included in the consolidated results of operations beginning January 1, 2017.
11
CHARAH
SOLUTIONS, INC.
Notes to Condensed Consolidated & Combined Financial Statements, continued
(dollars in thousands except per share and unit data)
Pro forma net loss attributable to Charah Solutions, Inc.
(12,568
)
The above unaudited pro forma results have been calculated by combining the historical results of the Company and the acquired business as if the acquisition had occurred as of the beginning of the fiscal year prior to the acquisition date, and then adjusting the income tax provisions as if they had been calculated based
on the consolidated and combined results. The pro forma results include estimates for additional depreciation related to the fair value of property, plant and equipment and intangible asset amortization.
The pro forma results reflect the elimination of $589 of direct acquisition costs that were incurred in the nine months ended September 30, 2018 (since for purposes of the pro forma presentation they have been reflected in 2017 instead of in 2018). For all periods presented, historical depreciation and amortization expense of the acquired business was adjusted to reflect the acquisition date fair value amounts of the related tangible and intangible assets. No other material pro forma adjustments were deemed necessary, either to conform the
acquisition to the Company’s accounting policies or for any other situation. The pro forma information is not necessarily indicative of the results that would have been achieved had the transactions occurred on the date indicated or that may be achieved in the future.
4. Equity Method Investment
Charah has an investment in a company that provides ash management and remarketing services to the electric utility industry. Charah accounts for its investment under the equity method of accounting because Charah has significant influence over the financial and operating policies of the company. Charah had a receivable due from the equity method
investment of $264 and $108 at September 30, 2019 and December 31, 2018, respectively.
Summarized balance sheet information of our equity method investment entity is as follows:
As of September 30, 2019 and December 31, 2018, definite-lived intangible assets included customer relationships, technology, non-compete and other agreements, SCB trade name (see Note 3) and a rail easement. These assets are amortized on a straight-line basis over their estimated useful lives as shown in the table below. Amortization expense was $2,094 and $2,135 during the three months ended September 30, 2019 and 2018,
respectively, and $6,305 and $6,232 during the nine months ended September 30, 2019 and 2018, respectively.
Definite-Lived Intangible Asset
Useful Life
Customer relationships
10
years
Technology
10 years
Non-compete and other agreements
2 years
SCB trade name
5 years
Rail easement
2 years
Goodwill
and Indefinite-Lived Intangible Assets
Goodwill represents the excess purchase price over the fair value of the net assets acquired in a business combination. Our goodwill included in the unaudited condensed consolidated balance sheets as of September 30, 2019 and December 31, 2018
13
CHARAH SOLUTIONS, INC.
Notes to Condensed Consolidated & Combined Financial Statements, continued
(dollars in thousands except per share and unit data)
(Unaudited)
was
$74,213. Our intangible assets as of September 30, 2019 and December 31, 2018 include a trade name valued at $34,330 that is considered to have an indefinite life.
Goodwill and indefinite-lived intangible assets are not amortized, but instead are tested for impairment annually or more often if events or changes in circumstances indicate that the fair value of the asset may have decreased below its carrying value. We perform our impairment test effective October 1st of each year and evaluate for impairment indicators between annual impairment tests.
As a result of the
Company’s decline in revenue and the operating loss recognized for the six months ended June 30, 2019, the Company performed the first step of the two step analysis for the Environmental Solutions reporting unit during the quarter ended June 30, 2019 and determined that no impairment of goodwill occurred as a result of this triggering event. The Environmental Solutions reporting unit’s fair value, as calculated, was approximately 5.4% greater than its book value as of June 30, 2019. We determined that there were no additional indicators of impairment at September 30, 2019 or September 30,
2018 in the Environmental Solutions or Maintenance and Technical Services reporting units.
The valuation used to test goodwill for impairment is dependent upon a number of significant estimates and assumptions, including macroeconomic conditions, growth rates, competitive activities, cost containment, margin expansion and the Company's business plans. We believe these estimates and assumptions are reasonable. However, future changes in the judgments, assumptions and estimates that are used in our impairment testing for goodwill, including discount and tax rates or future cash flow projections, could result in significantly different estimates of the fair values. As a result of these factors and the related cushion as of the date of the previous annual impairment test, goodwill for the Environmental Solutions reporting
unit is more susceptible to impairment risk.
The most significant assumptions utilized in the determination of the estimated fair value of the Environmental Solutions reporting unit are the net sales and earnings growth rates (including residual growth rates) and the discount rate. The residual growth rate represents the rate at which the reporting unit is expected to grow beyond the shorter-term business planning period. The residual growth rate utilized in our fair value estimate is consistent with the reporting unit operating plans and approximates expected long-term category market growth rates and inflation. The discount rate, which is consistent with a weighted average cost of capital that is likely to be expected by a market participant, is based upon industry required rates of return, including consideration of both debt and equity components of the capital structure. Our discount rate may be impacted by adverse changes
in the macroeconomic environment, volatility in the equity and debt markets or other factors.
While management can and has implemented strategies to address these events, changes in operating plans or adverse changes in the future could reduce the underlying cash flows used to estimate fair values and could result in a decline in fair value that would trigger future impairment charges of the reporting unit’s goodwill balance. The table below provides a sensitivity analysis for the Environmental Solutions reporting unit, utilizing reasonably possible changes in the assumptions for the shorter-term revenue and residual growth rates and the discount rate, to demonstrate the potential impacts to the estimated fair values. The table below provides, in isolation, the estimated fair value impacts related to (i) a 75-basis point increase to the discount rate assumption and (ii) a 100-basis
point decrease to our shorter-term revenue and residual growth rates assumptions, both of which would result in impairment charges.
Approximate Percent Decrease in Estimated Fair Value
+75 bps Discount Rate
-100 bps Growth Rate
Environmental Solutions reporting
unit
6.5
%
5.7
%
6. Credit Agreement
On September 21, 2018, we entered into a credit agreement (the “Credit Facility”) by and among us, the lenders party thereto from time to time and Bank of America, as administrative agent (the “Administrative Agent”). The Credit Facility includes:
•a revolving loan not to exceed $50,000
(the “Revolving Loan”);
•a term loan of $205,000 (the “Closing Date Term Loan”); and
•
a commitment to loan up to a further $25,000 in term loans, which expires in March 2020 (the “Delayed Draw Commitment” and the term loans funded under such Delayed Draw Commitment, the “Delayed Draw Term Loan”, together with the Closing Date Term Loan, the “Term Loan”).
14
CHARAH
SOLUTIONS, INC.
Notes to Condensed Consolidated & Combined Financial Statements, continued
(dollars in thousands except per share and unit data)
(Unaudited)
All amounts associated with the Revolving Loan and the Term Loan under the Credit Facility mature in September 2023. The interest rates per annum applicable to the loans under the Credit Facility are based on a fluctuating rate of interest measured by reference to, at our election, either (i) the Eurodollar rate, currently the London Inter-bank Offered Rate (“LIBOR”), or (ii) an alternative base rate. Various margins are added to the interest rate based upon our consolidated net leverage ratio (as defined in the Credit Facility). Customary fees are payable in respect
of the Credit Facility and include (i) commitment fees for unused portions of the Credit Facility and (ii) fees on outstanding letters of credit. Amounts borrowed under the Credit Facility are secured by essentially all of the assets of the Company.
The Credit Facility contains various representations and warranties, and restrictive covenants that, among other things and subject to specified exceptions, restrict the ability of us and our restricted subsidiaries to grant liens, incur indebtedness (including guarantees), make investments, engage in mergers and acquisitions, make dispositions of assets, make restricted payments or change the nature of our or their business. The Credit Facility contains financial covenants related to the consolidated net
leverage ratio and the fixed charge coverage ratio (as defined in the Credit Facility). The restricted covenants after giving effect to Amendment No. 2 to Credit Agreement and Waiver (the “Amendment”) are described more fully below.
The Credit Facility also contains certain affirmative covenants, including reporting requirements, such as delivery of financial statements, certificates and notices of certain events, maintaining insurance and providing additional guarantees and collateral in certain circumstances.
The Credit Facility includes customary events of default, including non-payment of principal, interest or fees, violation of covenants, inaccuracy of representations or warranties, cross default to certain other material indebtedness, bankruptcy and insolvency events, invalidity or impairment of guarantees or security interests, material judgments and change of control.
The
Revolving Loan provides a principal amount of up to $50,000, reduced by outstanding letters of credit. As of September 30, 2019, $10,215 was outstanding on the Revolving Loan and $11,980 of letters of credit were outstanding.
But for the Amendment, as of June 30, 2019, we would not have been in compliance with the requirement to maintain a consolidated net leverage ratio of 3.75 to 1.00 under the Credit Facility. On August 13, 2019, we entered into the Amendment, pursuant to which, among other things, the required lenders agreed to waive such non-compliance.
In
addition, pursuant to the terms of the Amendment, the Credit Facility was amended to revise the required financial covenant ratios such that, after giving effect to the Amendment, we are not required to comply with any financial covenants through March 30, 2020. After March 30, 2020, we will be required to comply with a consolidated net leverage ratio of 6.50 to 1.00 from March 31, 2020 through September 29, 2020, decreasing to 3.00 to 1.00 as of September 30, 2020 and thereafter. After giving effect to the Amendment, we will also be required to comply with a fixed charge coverage ratio of 0.75
to 1.00 as of March 31, 2020, 0.90 to 1.00 as of June 30, 2020 and 1.20 to 1.00 thereafter. In the event that we are unable to comply in the future with such financial covenants upon delivery of our financial statements pursuant to the terms of the Credit Facility, an Event of Default will have occurred and the Administrative Agent can then, following a specified cure period, declare the unpaid principal amount of all outstanding loans, all interest accrued and unpaid thereon, and all other amounts payable to be immediately due and payable by the Company.
As consideration for the accommodations described above, we have agreed that amounts borrowed pursuant
to the Delayed Draw Commitment will not exceed $15,000 at any one time outstanding (without reducing the overall Delayed Draw Commitment amount). In addition, any Delayed Draw Term Loans shall incur additional interest at a rate equal to 10.0% per annum on all amounts outstanding in excess of $10,000 of Delayed Draw Term Loans. Further, the margin of interest that will be charged on all outstanding loans has been increased to 4.00% for loans based on LIBOR and 3.00% for loans based on the alternative base rate. The Amendment revised the amount of (i) the commitment fees to 0.35% at all times for unused portions of the Credit Facility and (ii) fees on outstanding letters of credit to 3.35%
at all times. The Amendment also added a requirement to make two additional scheduled prepayments of outstanding loans under the Credit Facility, including a payment of $50,000 on or before September 13, 2019 and an additional payment of $40,000 on or before March 31, 2020.
The $50,000 payment was made prior to September 13, 2019, using the payment collected related to the early completion of the Brickhaven deemed termination. Regarding the March 2020 debt payment of $40,000, management has evaluated its ability to make this payment and meet our other
financial obligations using our most recent financial forecast, which includes consideration of projected cash flows from operations, anticipated availability under the Credit Facility and prudent working capital management. The financial forecast does not anticipate incurring material unexpected losses in existing operations or new work awards being materially delayed. Though management believes that the Company will not be able to make the $40,000 payment due in March 2020 and meet our other obligations as they become due over the next year based solely on projected cash flows from operations,
15
CHARAH SOLUTIONS, INC.
Notes
to Condensed Consolidated & Combined Financial Statements, continued
(dollars in thousands except per share and unit data)
(Unaudited)
anticipated availability under the revolving credit facility and prudent working capital management, we expect to execute transactions and/or utilize other sources of funding that provide additional liquidity necessary to meet our obligations as they become due.
We are actively pursuing, with authority from the Board of Directors, a variety of strategic transactions and cost-cutting measures, including, but not limited to, asset divestitures, alternative sources of capital, reduction in corporate discretionary expenditures and capital expenditures, and other operational efficiencies. We believe
it is probable that these measures, as we continue to implement them, will enable us to make this payment and meet our other obligations as they become due through at least 12 months from the date that these financial statements were issued. If these initiatives are not successful or other unanticipated headwinds in our business occur, the Company could be required to amend or obtain a waiver from the Administrative Agent, and there is no assurance that we could obtain such amendment or waiver. If we are unable to complete such initiatives by the required debt payment due dates and we are unable to obtain an amendment or waiver from the Administrative Agent, the Company has the ability to access additional related party funding.
The Amendment also includes
revisions to the restrictive covenants, including removing certain exceptions to the restrictions on our ability to make acquisitions, to make investments and to make dividends or other distributions. After giving effect to the Amendment, we will not be permitted to make any distributions or dividends to our stockholders without the consent of the required lenders.
16
CHARAH SOLUTIONS, INC.
Notes to Condensed Consolidated & Combined Financial Statements, continued
(dollars in thousands except per share and unit data)
(Unaudited)
7.
Notes Payable
The following table summarizes the major components of debt at each balance sheet date and provides maturities and interest rate ranges for each major category as of September 30, 2019 and December 31, 2018:
Various equipment notes entered into in November 2017, payable in monthly installments ranging from $5 to $24, including interest at 5.2%, maturing in December 2022 through December 2023. The notes are secured by equipment with a net book value of $3,635 as of September 30, 2019.
$
3,708
$
4,949
Various equipment
notes entered into in 2018, payable in monthly installments ranging from $1 to $39, including interest ranging from 5.6% to 6.8%, maturing in March 2023 through May 2025. The notes are secured by equipment with a net book value of $10,274 as of September 30, 2019.
11,393
12,293
Various equipment notes entered into in 2019, payable in monthly installments ranging from $2 to $4, including interest ranging from 3.9% to 4.7%, maturing in May 2021 through September 2024. The notes are secured by equipment with
a net book value of $545 as of September 30, 2019.
544
—
In June 2018, the Company entered into a $12,000 convertible, non-revolving credit note with a bank. The credit note converted to a term loan on April 10, 2019, with a maturity date of April 10, 2024. Interest on borrowings subsequent to the conversion date is calculated
at a fixed rate per annum equal to 4.4%. The note is secured by equipment with a net book value of $9,150 as of September 30, 2019.
10,800
8,299
In April 2019, the Company entered into a $4,000 convertible, non-revolving credit note with a bank. Interest on borrowings is calculated at a fixed rate per annum equal to 4.6%. The note is secured by equipment with a net book value of $1,422 as of September
30, 2019. Subsequent to September 30, 2019, the outstanding balance on this note was paid off in full.
1,493
—
In July 2019, the Company entered into a commercial insurance premium financing agreement, payable in monthly installments of $169, including interest of 4.4%, maturing in March 2020.
1,004
—
A
$10,000 equipment line with a bank, entered into in December 2017, secured by all equipment purchased with the proceeds of the loan. Interest is calculated on any outstanding amounts using a fixed rate of 4.5%. The equipment line converted to a term loan in September 2018, with a maturity date of June 22, 2023. The note is secured by equipment with a net book value of $7,092 as of September 30, 2019.
8,188
9,563
The Closing Date Term Loan and the Delayed
Draw Term Loan entered into in September 2018 as part of the Credit Facility (see Note 6). The interest rate applicable to the Closing Date Term Loan and the Delayed Draw Term Loan is based on a fluctuating rate of interest measured by reference to, at the Company’s election, either (i) the Eurodollar rate, currently LIBOR, or (ii) an alternative base rate. Principal payments required are $2,563 in December 2019, $42,688 in March 2020, $2,688 quarterly through September 2020, $4,031 quarterly through September 2022 and $5,375 quarterly through September 2023. The remaining outstanding amounts will be due in September 2023. The loan is secured by substantially all of the assets of the Company, and is subject to certain financial covenants.
154,750
202,438
Total
191,880
237,542
Less
debt issuance costs
(2,765
)
(3,252
)
189,115
234,290
Less current maturities
(60,565
)
(23,268
)
Notes
payable due after one year
$
128,550
$
211,022
8. Interest Rate Swap
In order to manage interest rate risk in a cost-efficient manner, the Company entered into an interest rate swap during 2017 whereby the
Company agreed to exchange with the counterparty, at specified intervals, the difference between fixed and
17
CHARAH SOLUTIONS, INC.
Notes to Condensed Consolidated & Combined Financial Statements, continued
(dollars in thousands except per share and unit data)
(Unaudited)
variable interest amounts calculated by reference to a notional amount. The interest rate swap is not designated for hedge accounting. The change in fair value of the interest rate swap is immediately recognized in earnings, within interest expense.
As
of both September 30, 2019 and December 31, 2018, the notional amount of the interest rate swap was $150,000. A fair value liability of $1,207 was recorded within other liabilities in the unaudited condensed consolidated balance sheet as of September 30, 2019 and a fair value asset of $891 was recorded within other assets in the unaudited condensed consolidated balance sheet as of December 31, 2018. The total amount of loss included in interest expense, net
in the unaudited condensed consolidated statements of operations for the three and nine months ended September 30, 2019 was $302 and $2,098, respectively, and the total amount of gain subtracted from interest expense, net in the unaudited condensed consolidated and combined statements of operations for the three and nine months ended September 30, 2018 was $629 and $2,857, respectively.
9. Costs
and Estimated (Losses) Earnings on Uncompleted Contracts
Costs and estimated (losses) earnings on uncompleted contracts are as follows:
Costs and estimated earnings in excess of billings
$
11,550
$
86,710
Billings
in excess of costs and estimated earnings
(393
)
(1,352
)
Net balance in process
$
11,157
$
85,358
Anticipated
losses on long-term contracts are recognized when such losses become evident. As of September 30, 2019 and December 31, 2018, accruals for anticipated losses on long-term contracts were $471 and $677, respectively.
10. Stock/Unit-Based Compensation
The Limited Liability Company Agreement for Charah Management provided for the issuance of up to 1,000
Series C profits interests (the “Charah Series C Profits Interests”). In 2017, Charah Management adopted the Charah Series C Profits Interest Plan and issued 650 of such units to employees. The Charah Series C Profits Interests participated in distributions to Charah members based on specified rates of return being realized on the Charah Management LLC Series A Membership Interests and the Charah Management LLC Series B Membership Interests. The Charah Series C Profits Interest Plan is no longer in place following our corporate reorganization and related IPO. The Charah Series C Profits Interests would have vested ratably in each of the first five anniversaries of their grant date with vesting accelerated upon a change of control. There were 540 Charah Series C Profits Interests unvested at June 18,
2018, which were canceled as a result of the corporate reorganization that occurred upon the closing of the IPO (see further discussion below).
The Limited Liability Company Agreement for Allied provided for the issuance of up to 1,000 Series C profits interests (the “Allied Series C Profits Interests”). In 2017, Allied adopted the Allied Series C Profits Interest Plan and issued 550 of such units to employees. The Allied Series C Profits Interests participated in distributions to Allied members based on specified rates of return being realized on the Allied Power Management, LLC Series A Membership Interests and the Allied Power Management, LLC Series B Membership Interests. The Allied Series C Profits Interest Plan is no longer in place following our corporate reorganization and related IPO. The Allied Series C Profits Interests
vested immediately upon grant.
In connection with the corporate reorganization that occurred upon the closing of the IPO, the holders of the Charah Series C Profits Interests and the Allied Series C Profits Interests received 1,215,956 shares of common stock (the “Management Reorganization Consideration”) in exchange for the contribution to the Company of their Charah Series C Profits Interests and
18
CHARAH SOLUTIONS, INC.
Notes to Condensed Consolidated & Combined Financial Statements, continued
(dollars
in thousands except per share and unit data)
(Unaudited)
Allied Series C Profits Interests. Of these shares, 303,993 vested immediately and 911,963 are subject to time-based vesting conditions, as well as performance vesting conditions, based on specified EBITDA targets and achievement of certain safety metrics, which will be determined at a future date. In addition, 272,708 shares of common stock were issued under the Charah Solutions, Inc. 2018 Omnibus Incentive Plan (the “2018 Plan”). Of these shares, 68,176 vested immediately and 204,532 are subject to the same time-based vesting
conditions and performance vesting conditions as the shares issued as part of the Management Reorganization Consideration. The fair value of the awards was calculated initially as $12 per share, and will be updated thereafter for changes at each reporting period until the performance targets are approved by the Company’s board of directors. The fair value of the awards is recognized over the required service period for each grant. As of September 30, 2019, 500,253 of the shares subject to time-based and performance vesting conditions were vested.
Upon the closing of the IPO, the board of directors of the
Company adopted the 2018 Plan, pursuant to which employees, consultants and directors of the Company and its affiliates, including named executive officers, are eligible to receive awards. The 2018 Plan provides for the grant of stock options, stock appreciation rights, restricted stock, restricted stock units, bonus stock, dividend equivalents, other stock-based awards, substitute awards, annual incentive awards and performance awards intended to align the interests of participants with those of Company stockholders. The Company has reserved 3,006,582 shares of common stock for issuance under the 2018 Plan, and all future equity awards described above will be issued pursuant to the 2018 Plan.
During the
three months ended June 30, 2018, the Company issued 44,198 shares under the 2018 Plan that vested after one year. The fair value of the awards was calculated as $12 per share, which was recognized over the one year vesting period. As of September 30, 2019, 31,577 of the shares were vested and 12,621 had been forfeited. During the three months ended September
30, 2018, the Company issued 45,004 shares under the 2018 Plan that vested after one year. The fair value of the awards was calculated as $7.67 per share, which was recognized over the one year vesting period. As of September 30, 2019, 36,670 of the shares were vested and 8,334 had been forfeited.
There were no grants or awards during the three months ended September 30,
2019. During the nine months ended September 30, 2019, the Company granted 755,455 restricted stock units (“RSUs”) under the 2018 Plan that are time-based. Of these RSUs, 116,381 vest after one year, 550,106 vest in equal installments over three years, and 88,968 vest in equal installments over four years. The fair value of these RSUs is based on the market price of the
Company's shares on the grant date. As of September 30, 2019, none of the shares were vested. During the nine months ended September 30, 2019, we also granted 330,628 performance share units (“PSUs”) under the 2018 Plan that cliff vest after three years. The vesting of these PSUs is dependent upon the Company’s achievement of certain stock price metrics. The fair value of the PSUs was determined using a binomial lattice model based upon the grant date stock price, a risk-free interest rate of 2.29% based upon the U.S. Treasury yield curve in effect
at the time of the grants, and an assumed volatility rate of 30% based upon a comparable public company analysis. As of September 30, 2019, none of the shares were vested.
Stock-based
compensation expense related to the shares issued as part of the Management Reorganization Consideration and the 2018 Plan was $659 and $1,046 during the three months ended September 30, 2019 and 2018, respectively, and $1,666 and $2,235 during the nine months ended September 30, 2019 and 2018, respectively.
19
CHARAH
SOLUTIONS, INC.
Notes to Condensed Consolidated & Combined Financial Statements, continued
(dollars in thousands except per share and unit data)
(Unaudited)
As of September 30, 2019, total unrecognized stock-based compensation expense related to non-vested awards, net of estimated forfeitures, was $4,436, and is expected to be recognized over a weighted-average period of 1.84 years. The total fair value of awards vested for the three and nine months ended September 30,
2019 was $281 and $5,966, respectively.
11. Commitments and Contingencies
We are party to a lawsuit filed against North Carolina by an environmental advocacy group alleging that the issuance by the state of certain permits associated with our Brickhaven clay mine reclamation site exceeded the state’s power. Although the state’s authority to issue the bulk of the permits (i.e., the allowance to reclaim the original site with coal ash) was upheld, the portion of the permits that allows us to “cut and prepare” an additional portion of the site was held by the North Carolina Superior Court to exceed the relevant agency’s statutory authority. The North Carolina Superior
Court’s decision was reversed and remanded back to the North Carolina Office of Administrative Hearing. Dispositive motions filed by us and the North Carolina Department of Environmental Quality are pending before the North Carolina Office of Administrative Hearing. All customer related work at the Brickhaven site has been completed.
Allied and its affiliate, Allied Power Resources, LLC, have been named in a collective action lawsuit filed in the U.S. District Court for the Northern District of Illinois, alleging violations of the Fair Labor Standards Act, and which includes related class claims alleging violations of the Illinois Minimum Wage Law and the Pennsylvania Minimum Wage Act for failure to pay overtime. This case is one of a series filed against companies in the oil, gas and energy industries in Illinois and Texas. The parties mediated this case in November 2018 and reached a settlement, contingent upon court approval.
The parties are working to finalize the joint motion to approve the settlement to submit to the court for approval.
In addition to the above matters, we are from time to time party to various lawsuits, claims and other legal proceedings that arise in the ordinary course of our business. With respect to all such lawsuits, claims and proceedings, we record reserves when it is probable a liability has been incurred and the amount of loss can be reasonably estimated. Although it is difficult to predict the ultimate outcome of these lawsuits, claims and proceedings, we do not believe that the ultimate disposition of any of these matters, individually or in the aggregate, would have a material adverse effect on our results of operations, financial position or cash flows. We maintain liability insurance for certain risks that is subject to certain self-insurance limits.
We believe
amounts previously recorded are sufficient to cover any liabilities arising from the proceedings with all outstanding legal claims. Except as reflected in such accruals, we are currently unable to estimate a range of reasonably possible loss, or a range of reasonably possible loss in excess of the amount accrued, for outstanding legal matters.
12. Business Segment and Related Information
The Company has identified two reportable segments, Environmental Solutions and Maintenance and Technical Services, as each met the quantitative threshold of generating revenue equal to or greater than 10% of the combined revenue of all operating segments.
The
accounting policies applied to determine the segment information are the same as those described under “Critical Accounting Policies and Estimates” in Part II, “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2018. Management evaluates the performance of each segment based on segment gross profit, which is calculated as revenue less cost of sales. For the nine months ended September 30, 2019 and 2018, there were no intersegment revenue or other intersegment transactions. Segment assets are also evaluated by management based on each segment’s investment in property
and equipment. Assets (other than property and equipment and goodwill) are not allocated to segments.
Summarized financial information with respect to the reportable segments is as follows:
The Company’s income tax benefit was $1,100 and $7,489 for the three and nine months ended September 30, 2019, respectively, and $5,667 and $2,761 for the three and nine months ended September 30, 2018, respectively.
The Company’s effective
income tax rate for the three and nine months ended September 30, 2019 was 32.3% and 25.5%, respectively. The effective income tax rate includes the effect of state income taxes, nondeductible items and benefits for noncontrolling interests.
The Company evaluates its effective income tax rate at each interim period and adjusts it accordingly as facts and circumstances warrant. The determination of the annual estimated effective income tax rate at each interim period requires certain estimates and judgments including, but not limited to, the expected operating income for the year, estimated permanent differences
between book and tax amounts, and the likelihood of recovering deferred tax assets generated in the current year, primarily net operating loss and other carryforwards, and our ability to uphold certain tax positions. The accounting estimates used to compute the provision for income taxes may change as new events occur and additional information is obtained.
At September 30, 2019, deferred tax assets, net of deferred tax liabilities, was $10,250. A valuation allowance is recorded if it is more likely than not that a portion of the Company’s deferred tax assets will not be realized. The Company evaluates both the positive
and negative evidence in determining the need for a valuation allowance on its deferred tax assets. Realization of net operating losses and other carryforwards is dependent upon generating sufficient taxable income in the appropriate jurisdiction prior to the expiration of the carryforward periods, which involves business plans, planning opportunities and expectations about future outcomes. Although realization is not assured, management believes it is more likely than not that our deferred tax assets will be realized. Therefore, no valuation allowance has been recorded for our deferred tax assets. The Company will continue to evaluate the need for a valuation allowance on its deferred tax assets in future periods.
22
CHARAH
SOLUTIONS, INC.
Notes to Condensed Consolidated & Combined Financial Statements, continued
(dollars in thousands except per share and unit data)
(Unaudited)
14. Loss Per Share
Basic loss per share is computed by dividing net loss attributable to the Company’s stockholders by the weighted-average number of shares outstanding during the period. Diluted loss per share reflects all potential dilutive ordinary shares outstanding during the period and is computed by dividing net loss attributable to the Company’s stockholders
by the weighted-average number of shares outstanding during the period increased by the number of additional shares that would have been outstanding as dilutive securities. For the periods prior to the IPO, the average number of ordinary shares outstanding used to calculate basic and diluted loss per share was based on the ordinary shares that were outstanding at the time of the IPO.
As a result of the net loss per share for the three and nine months ended September 30, 2019, the inclusion of all potentially dilutive shares would be anti-dilutive. Therefore, dilutive shares (in thousands) of 1,510 and 1,299 were excluded from the computation of the weighted-average shares for diluted net loss
per share for the three and nine months ended September 30, 2019, respectively.
Basic and diluted loss per share is determined using the following information:
Total weighted-average shares outstanding, including dilutive shares
29,605
29,083
29,452
25,777
Basic
loss per share
$
(0.11
)
$
(0.60
)
$
(0.82
)
$
(0.52
)
Diluted
loss per share
$
(0.11
)
$
(0.60
)
$
(0.82
)
$
(0.52
)
23
Item
2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with the historical financial statements and related notes included in Part I, “Item 1. Financial Statements” of this Quarterly Report. This discussion contains “forward‑looking statements” reflecting our current expectations, estimates and assumptions concerning events and financial trends that may affect our future operating results or financial position. Actual results and the timing of events may differ materially from those contained in these forward‑looking statements due to a number of factors. Factors that could cause or contribute to such differences include, but are not limited to, capital expenditures, economic and competitive conditions,
and regulatory changes and other uncertainties, as well as those factors discussed below and elsewhere in this Quarterly Report. Please read “Cautionary Note Regarding Forward‑Looking Statements” included elsewhere in this Quarterly Report. Except as otherwise required by applicable law, we assume no obligation to update any of these forward‑looking statements.
Our Predecessor and Charah Solutions, Inc.
Charah Solutions, Inc. (together with its subsidiaries, “Charah Solutions,” the “Company,”“we,”“us” or “our”) was formed as a Delaware corporation in January 2018 and did
not conduct any material business operations prior to the reorganization transactions described below under “—Initial Public Offering” other than certain activities related to the initial public offering (the “IPO”), which was completed on June 18, 2018. In connection with the closing of the IPO and pursuant to the terms and conditions of the master reorganization agreement dated June 13, 2018, Charah Management LLC, a Delaware limited liability company (“Charah Management”), and Allied Power Holdings, LLC, a Delaware limited liability company (“Allied Power Holdings”), became our wholly owned subsidiaries.
Through our ownership of Charah Management and Allied Power Holdings, we own the outstanding equity interests
in Charah, LLC, a Kentucky limited liability company (“Charah”), and Allied Power Management, LLC, a Delaware limited liability company (“Allied”), the subsidiaries through which we operate our businesses.
Overview
We were formed in January 2018 in anticipation of the IPO to be a holding company for Charah Management and Allied Power Holdings. The historical financial data presented herein as of September 30, 2019 and December 31, 2018 and for the periods after the June 18, 2018 corporate reorganization is that
of Charah and Allied on a consolidated basis and is on a combined basis for the periods prior to the June 18, 2018 corporate reorganization. Allied was formed in May 2017 and did not commence operations until July 2017.
We are a leading provider of mission-critical environmental and maintenance services to the power generation industry, enabling our customers to address challenges related to the remediation of ash ponds and landfills at open and closed power plant sites while continuously operating and providing necessary electric power to communities nationwide. We offer a suite of coal ash management and recycling, environmental remediation and outage maintenance services. We also design and implement solutions for complex environmental projects (such as coal ash pond closures) and facilitate coal ash recycling through byproduct sales and other beneficial use services. We
operate in over 20 states, resulting in an overall footprint and density in key markets that we believe is difficult to replicate.
We are an environmental remediation and maintenance company and conduct our operations through two segments: Environmental Solutions and Maintenance and Technical Services.
Environmental Solutions. Our Environmental Solutions segment includes remediation and compliance services, as well as byproduct sales offerings. Remediation and compliance services are associated with our customers’ need for multi-year environmental improvement and sustainability initiatives, whether driven by proactive engagement, by power generation customers, by regulatory requirements or by consumer expectations and standards. Byproduct sales support both our power generation customers’ desire to profitably recycle recurring and historic volumes of coal
combustion residuals and our ultimate end customers’ need for high-quality, cost-effective raw material substitutes.
Maintenance and Technical Services. Our Maintenance and Technical Services segment includes fossil services and, from May 2017 when Allied was created, nuclear services. Fossil services are the recurring and mission-critical management of coal ash and the routine maintenance, outage services, facility maintenance and staffing solutions for coal-fired power generation facilities. Nuclear services, which we market under the Allied Power brand name, include routine maintenance, outage services, facility maintenance and staffing solutions for nuclear power generation facilities. The Maintenance and Technical Services segment offerings are most closely associated with the ongoing operations of power plants, whether in the form of daily environmental management or required maintenance services
(typically during planned outages).
24
Initial Public Offering
On June 18, 2018, we completed the IPO of 7,352,941 shares of the Company’s common stock, par value $0.01 per share. The net proceeds of the IPO to us prior to offering expenses were approximately $59.2 million. We used a portion of the IPO proceeds to pay off approximately $40.0 million of the borrowings outstanding under the Term Loan (as defined below), and any remaining net proceeds were used to pay offering expenses or used for general corporate purposes.
How We Evaluate
Our Operations
We use a variety of financial and operational metrics to assess the performance of our operations, including:
•Revenue;
•Gross Profit;
•Operating Income;
•Adjusted EBITDA; and
•Adjusted EBITDA Margin.
Revenue
We analyze our revenue by comparing actual revenue to our internal projections for a given period and to prior periods to assess our performance. We believe that revenue is a meaningful indicator of the demand and pricing for our services.
Gross
Profit
We analyze our gross profit, which we define as revenue less cost of sales, to measure our financial performance. We believe that gross profit is a meaningful metric because it provides insight on financial performance of our revenue streams without consideration of company overhead. When analyzing gross profit, we compare actual gross profit to our internal projections for a given period and to prior periods to assess our performance.
Operating Income
We analyze our operating income, which we define as revenue less cost of sales and general and administrative expenses, to measure our financial performance. We believe that operating income is a meaningful metric because it provides insight on profitability and true operating performance based on the historical cost basis of our assets. When analyzing operating income, we compare
actual operating income to our internal projections for a given period and to prior periods to assess our performance.
Adjusted EBITDA and Adjusted EBITDA Margin
We view Adjusted EBITDA and Adjusted EBITDA margin, which are non-GAAP financial measures, as important indicators of performance. We define Adjusted EBITDA as net loss before interest expense, income taxes, depreciation and amortization, equity-based compensation, non-recurring legal costs and expenses and start-up costs, the Brickhaven contract deemed termination revenue reversal, and transaction-related expenses and other items. Adjusted EBITDA margin represents the ratio of Adjusted EBITDA to total revenue. See “—Non-GAAP Financial Measures” below for more information and a reconciliation of Adjusted EBITDA to net loss,
the most directly comparable financial measure calculated and presented in accordance with GAAP.
Key Factors Affecting Our Business and Financial Statements
Ability to Capture New Contracts and Business Opportunities
Our ability to grow revenue and earnings is contingent on maintaining and increasing our market share, renewing existing contracts and obtaining additional contracts from proactive bidding on contracts
with new and existing customers. We proactively work with existing customers ahead of contract end dates to secure contract renewals. We also leverage the embedded long-term nature of our customer relationships to obtain insight into and to capture new business opportunities across our platform.
Seasonality of Business
Based on historic trends, we expect our operating results to vary seasonally. Nuclear power generators perform turnaround and outages in the off-peak months when demand is lower and generation capacity is less constrained. As a result, our nuclear services offerings may have higher revenue volume in the spring and fall months. Variations in normal weather patterns can also cause changes
in the consumption of energy, which may influence demand and timing of associated services for our fossil services offerings. Inclement weather can impact construction-related activities associated with pond and landfill remediation, which affects the timing of revenue generation for our remediation and compliance services. Our byproduct sales offerings are also impacted during the winter months when the utilization of cement and cement products is generally lower.
25
Project-Based Nature of Environmental Remediation Mandates
We believe there is a significant pipeline of coal ash ponds and landfills that will require remediation and/or closure in the future. Due to their scale and complexity, these environmental
remediation projects are typically completed over long periods of time. As a result, our revenue from these projects can fluctuate over time. Some of our revenue from projects are recognized using the percentage of completion method of accounting for GAAP purposes. This method of revenue recognition is determined by estimating the percentage of completion on a job and the ultimate estimated gross profit margin on the job. The timing of revenue recorded for financial reporting purposes may differ from actual billings to customers, sometimes resulting in costs and billings in excess of actual revenue. Because of the risks in estimating gross profit margins for long-term jobs, actual results may differ from these estimates.
Byproduct Recycling Market Dynamics
There is a growing demand for recycled coal ash across a variety of applications, in addition to the market forces and governmental
regulations driving the need to dispose of coal ash in an environmentally sensitive manner. Pricing of byproduct sales is driven by supply and demand market dynamics as well as the chemical and physical properties of the ash. As demand increases for the end-products that use recycled coal-fired power generation waste byproducts (i.e., concrete for construction and infrastructure projects), the demand for recycled coal ash also typically rises. These fluctuations affect the relative demand for our byproduct sales offerings. In recessionary periods, construction and infrastructure spending and the corresponding need for concrete may decline. However, this unfavorable effect may be partially offset by an increase in the demand for recycled coal ash during recessionary periods given that coal ash is more cost-effective than other alternatives.
Power Generation Industry Spend on Environmental Liability Management and Regulatory
Requirements
The power generation industry has increased annual spending on environmental liability management. We believe this is the result of not only regulatory requirements and consumer pressure, but also the industry’s increasing focus on environmental stewardship. Continued increases in spending on environmental liability management by our customers should result in increased demand for services across our platform.
Cost Management and Capital Investment Efficiency
Our main operating costs consist of labor, material and equipment costs and equipment maintenance. We maintain a focus on cost management and efficiency, including monitoring labor costs, both in terms of wage rates and headcount, along with other costs such as materials and equipment. We maintain a disciplined approach to capital expenditure decisions, which are typically
associated with specific contract requirements. Furthermore, we strive to extend the useful life of our equipment through the application of a well-planned routine maintenance program.
How We Generate Revenue
The Environmental Solutions segment generates revenue through our remediation and compliance services, as well as our byproduct sales offerings. Our remediation and compliance services primarily consist of designing, constructing, managing, remediating and closing ash ponds and landfills on customer-owned sites. Our byproduct sales offerings include the recycling of recurring and contracted volumes of coal-fired power generation waste byproducts, such as bottom ash, fly ash and gypsum byproduct, each of which can be used for various industrial purposes. Our platform of services is contracted
for terms generally ranging from 18 months to five years, thereby reducing financial volatility. In excess of 90% of our services work is structured as time and materials, cost reimbursable or unit price contracts, which significantly reduces the risk of loss on contracts and provides gross margin visibility. Revenue from management contracts is recognized when the ash is hauled to the landfill or the management services are provided. Revenue from the sale of ash is recognized when it is delivered to the customer.
The Maintenance and Technical Services segment generates revenue through our fossil services and nuclear services offerings. Maintenance and
Technical Services segment offerings are most closely associated with the ongoing operations of power plants, whether in the form of daily environmental management or required maintenance services (typically during planned outages). Our fossil services offerings focus on recurring and mission-critical management of coal ash and routine maintenance, outage services and staffing solutions for coal-fired power generation facilities to fulfill an environmental service need of our customers in handling their waste byproducts. Over the last five years, our renewal rate for fossil service offering contract has been approximately 90%. Our nuclear services operations, which we market under the Allied Power brand name, consist of a broad platform of mission-critical professional, technical and craft services spanning the entire asset life cycle of a nuclear power generator. The services
are performed on the customer’s site and the contract terms typically range from three to five years. Revenue is billed and paid during the periods of time work is being executed. This combination of the maintenance and environmental-related services deepens customer connectivity and drives long-term relationships which we believe are critical for renewing existing contracts, winning incremental business from existing customers at new sites and adding new customers.
Factors Impacting the Comparability of Results of Operations
26
Public
Company Costs
As a new public company, we have incurred, and expect to continue to incur, incremental recurring and certain non-recurring costs related to our transition to a publicly traded and taxable corporation, including the costs of the IPO and the costs associated with the initial implementation and testing of our Sarbanes-Oxley Section 404 internal controls. We also have incurred, and expect to incur, additional significant and recurring expenses as a publicly traded company, including costs associated with the employment of additional personnel, compliance under the Exchange Act, annual and quarterly reports to securityholders, registrar and transfer agent fees, national stock exchange fees, audit fees, incremental director and officer liability insurance costs, and director and officer compensation.
Income Taxes
Charah Solutions
is a “C” corporation under the Internal Revenue Code of 1986, as amended, and, as a result, will be subject to U.S. federal, state and local income taxes. In connection with the IPO, Charah and Allied, which previously were flow-through entities for income tax purposes and were indirect subsidiaries of two partnerships, Charah Management and Allied Power Holdings, respectively, became indirect subsidiaries of the Company. Prior to the contribution, Charah and Allied passed through their taxable income to the owners of the partnerships for U.S. federal and other state and local income tax purposes and, thus, were not subject to U.S. federal income taxes or other state or local income taxes, except
for franchise tax at the state level (at less than 1% of modified pre-tax earnings). Accordingly, the financial data attributable to Charah and Allied prior to the contribution on June 18, 2018 contains no provision for U.S. federal income taxes or income taxes in any state or locality other than franchise taxes.
Results of Operations
Overview of Financial Results
Delays in new work awards resulting from increased project scope and complexity, the $10.0 million revenue reversal associated with the Brickhaven contract payment (as previously disclosed), and unanticipated cost increases at three remediation sites led to our disappointing
financial performance for the nine months ended September 30, 2019. As a result of long sales cycles, driven by the increase in the size, scope and complexity of remediation and compliance projects that we are bidding on, the volume of new awards in 2018 was not sufficient to offset the impact of projects completed during 2018 and year-to-date 2019. The volume of new awards in 2019 on a project revenue basis, has increased over those awarded in 2018. Due to project timing, however, the significant majority of revenue contributions from these new awards will be recognized in 2020 and beyond. As remediation and compliance projects have gotten larger and more complex, utility customers are seeking regulatory clarity as well as cost recovery through rate relief. Though this delay is adversely impacting our 2019 results, we expect demand for our remediation and compliance services to grow as more than 1,000 ash ponds and landfills
still require EPA-mandated closure or remediation.
We continue to believe our market opportunities remain strong and are growing as we have signed approximately $385 million in new contracts year-to-date and are in exclusive negotiations on over $300 million in additional contracts. While the projects have been awarded later than anticipated, as previously mentioned, our success rate in winning awards for the nine months ended September 30, 2019 on a project revenue basis has been ahead of the nine months ended September 30, 2018. Compared to the current year, projects awarded in 2018 were considerably smaller in size on the basis of revenue, which
negatively impacted our financial results in 2019. As evidenced by our successes in winning new awards in 2019, we believe we are well-positioned to capture a significant portion of a large and growing addressable market, although the timing of future awards is difficult to determine. Furthermore, we believe recent regulatory developments in Illinois, Indiana, Kentucky, Missouri, North Carolina, Oklahoma, South Carolina and Virginia will have a positive impact on our business operations as states are becoming more prescriptive in their requirements to remediate ash ponds. Finally, customer interest in our MP618 thermal beneficiation technology continues to be strong, and contracts with utility customers are currently under discussion.
Our primary sources of liquidity and capital resources are cash flows generated by operating activities
and borrowings under the Credit Facility (as defined below). In part due to longer sales cycles, driven by the increase in the size, scope and complexity of remediation and compliance projects that we are bidding on, we experienced unexpected contract initiation delays and project completion delays, particularly in 2018, which have adversely affected our revenue and overall liquidity. Our lengthy and complex projects require us to expend large sums of working capital, and delays in payment receipts, project commencement or project completion can adversely affect our financial position and the cash flows that normally would fund our expenditures. See “—Liquidity and Capital Resources-Our Debt Agreements—Existing Credit Facility” below for more information about the Credit Facility and the amendment.
Additional information regarding
the results of operations follows below.
Less
income attributable to non-controlling interest
1,010
895
115
12.8
%
Net loss attributable to Charah Solutions, Inc.
$
(3,313
)
$
(17,395
)
$
14,082
(81.0
)%
Revenue.
Revenue decreased $64.9 million, or 34.9%, for the three months ended September 30, 2019 to $121.1 million as compared to $186.0 million for the three months ended September 30, 2018, driven primarily by a decrease in revenue in the Environmental Solutions segment. The change in revenue by segment was as follows:
Environmental Solutions Revenue. Environmental Solutions segment revenue decreased $57.8 million, or 55.7%,
for the three months ended September 30, 2019 to $46.0 million as compared to $103.8 million for the three months ended September 30, 2018. The decrease in revenue was primarily driven by project completions within our remediation and compliance services component, including the completion of the Brickhaven project resulting from the deemed termination, and a decrease in the value of projects won in 2018, partially offset by a net overall increase in revenue from our byproduct sales offerings.
Maintenance and Technical Services Revenue. Maintenance and Technical Services segment revenue decreased $7.1
million, or 8.6%, for the three months ended September 30, 2019 to $75.1 million as compared to $82.2 million for the three months ended September 30, 2018. The decrease in revenue was primarily attributable to fewer nuclear outages in the three months ended September 30, 2019, partially offset by a net overall increase in revenue from our fossil services offerings.
Gross Profit. Gross profit decreased $12.8
million, or 48.1%, for the three months ended September 30, 2019 to $13.9 million as compared to $26.7 million for the three months ended September 30, 2018, driven primarily by a decrease in revenue. As a percentage of revenue, gross profit was 11.4% and 14.4% for the three months ended September 30, 2019 and 2018, respectively. The change in gross profit by segment was as follows:
Environmental
Solutions Gross Profit. Gross profit for our Environmental Solutions segment decreased $13.1 million, or 65.8%, for the three months ended September 30, 2019 to $6.8 million as compared to $19.9 million for the three months ended September 30, 2018. The decrease in gross profit was primarily driven by project completions within our remediation and compliance services component and losses resulting from one project-specific issue continuing from the first quarter of 2019, partially offset by a net overall increase in gross profit from our byproduct sales offerings.
Maintenance
and Technical Services Gross Profit. Gross profit for our Maintenance and Technical Services segment increased $0.2 million, or 3.2%, for the three months ended September 30, 2019 to $7.1 million as compared to $6.9 million for the three months ended September 30, 2018. The increase in gross profit was primarily attributable to a net overall increase in gross profit from our fossil services offerings, partially offset by fewer nuclear outages in the three months ended September 30,
28
2019.
The increase in gross profit margin was primarily driven by an increase in revenue associated with our fossil service offerings that generate a higher gross profit.
General and Administrative Expenses. General and administrative expenses decreased $18.5 million, or 56.8%, for the three months ended September 30, 2019 to $14.1 million as compared to $32.6 million for the three months ended September 30, 2018. The decrease was primarily attributable to a reduction in non-recurring legal
costs and expenses, including $20.0 million in reserves incurred in the three months ended September 30, 2018 related to legal proceedings during that period, as disclosed in our Adjusted EBITDA calculation included herein, partially offset by increased transaction related expenses associated with the Amendment to the Credit Facility.
Interest Expense, Net. Interest expense, net decreased $13.2 million, or 77.5%, for the three months ended September 30, 2019 to $3.8 million as compared to $17.0
million for the three months ended September 30, 2018. The decrease was primarily attributable to $12.5 million of costs incurred in conjunction with the refinancing of our debt during the three months ended September 30, 2018, consisting of a $10.4 million non-cash write-off of debt issuance costs and a $2.1 million pre-payment penalty, and a reduction in the debt balances using cash received from the Brickhaven deemed termination payment received during the three months ended September 30, 2019.
Income from Equity Method Investment. Income from equity
method investment decreased $0.1 million, or 15.1%, for the three months ended September 30, 2019 to $0.7 million as compared to $0.8 million for the three months ended September 30, 2018. The slight decrease period-over-period was primarily attributable to a reduction in ash volumes generated by the utility and available for sale by us.
Net Loss. Net loss decreased $14.2 million, or 86.0%,
for the three months ended September 30, 2019 to $2.3 million as compared to $16.5 million for the three months ended September 30, 2018. The decrease was primarily attributable to lower general and administrative expenses and interest expense, net, partially offset by the decrease in gross profit as discussed above and the change in the income tax benefit of $4.6 million.
Less
income attributable to non-controlling interest
2,236
1,904
332
17.4
%
Net loss attributable to Charah Solutions, Inc.
$
(24,158
)
$
(13,370
)
$
(10,788
)
80.7
%
Revenue.
Revenue decreased $131.9 million, or 24.6%, for the nine months ended September 30, 2019 to $405.3 million as compared to $537.3 million for the nine months ended September 30, 2018, driven primarily by a decrease in revenue in the Environmental Solutions segment. The change in revenue by segment was as follows:
Environmental Solutions Revenue. Environmental Solutions segment revenue decreased $100.4
million, or 41.5%, for the nine months ended September 30, 2019 to $141.3 million as compared to $241.7 million for the nine months ended September 30, 2018. The decrease in revenue was primarily attributable to project completions within our remediation and compliance services component, including the completion of the Brickhaven project resulting from the deemed termination, the $10.0 million revenue reversal associated with the Brickhaven contract
payment, and a decrease in the value of projects won in 2018, partially offset by a net overall increase in revenue from our byproduct sales offerings.
Maintenance and Technical Services Revenue. Maintenance and Technical Services segment revenue decreased $31.5 million, or 10.7%, for the nine months ended September 30, 2019 to $264.0 million as compared to $295.5 million for the nine months ended September 30, 2018. The
decrease in revenue was primarily attributable to the reduced scope of nuclear outages services and fewer outages in the nine months ended September 30, 2019, partially offset by a net overall increase in revenue from our fossil services offerings.
Gross Profit. Gross profit decreased $49.2 million, or 64.4%, for the nine months ended September 30, 2019 to $27.2 million as compared to $76.4 million
for the nine months ended September 30, 2018, driven primarily by a decrease in revenue. As a percentage of revenue, gross profit was 6.7% and 14.2% for the nine months ended September 30, 2019 and 2018, respectively. The change in gross profit by segment was as follows:
Environmental Solutions Gross Profit. Gross profit for our Environmental Solutions segment decreased $48.5 million, or 89.2%,
for the nine months ended September 30, 2019 to $5.9 million as compared to $54.4 million for the nine months ended September 30, 2018. The decrease in gross profit was primarily driven by project completions within our remediation and compliance services component, the $10.0 million revenue reversal associated with the Brickhaven contract payment, adverse weather-related impacts and site-specific issues at three remediation sites.
Maintenance
and Technical Services Gross Profit. Gross profit for our Maintenance and Technical Services segment decreased $0.6 million, or 2.9%, for the nine months ended September 30, 2019 to $21.3 million as compared to $21.9 million for
30
the nine months ended September 30, 2018.
The decrease in gross profit was primarily attributable to a net overall reduction in gross profit from our nuclear services offerings, partially offset by a net overall increase in gross profit from our fossil services offerings.
General and Administrative Expenses. General and administrative expenses decreased $20.5 million, or 31.0%, for the nine months ended September 30, 2019 to $45.5 million as compared to $65.9 million for the nine months ended September 30,
2018. The decrease was primarily attributable to a reduction in non-recurring legal costs and expenses, including $20.0 million in reserves incurred in the nine months ended September 30, 2018 related to legal proceedings during that period, non-recurring start-up costs and equity-based compensation, as disclosed in our Adjusted EBITDA calculation included herein, partially offset by increased expenses due to the addition of SCB Materials International, Inc. and affiliated entities (“SCB”) in March 2018 and increased transaction-related expenses associated with the amendment to the Credit Facility.
Interest Expense, Net. Interest expense, net decreased $13.7
million, or 51.4%, for the nine months ended September 30, 2019 to $13.0 million as compared to $26.7 million for the nine months ended September 30, 2018. The decrease was primarily attributable to $12.5 million of costs incurred in conjunction with the refinancing of our debt during the nine months ended September 30, 2018, consisting of a $10.4 million non-cash write-off of debt issuance
costs and a $2.1 million pre-payment penalty, and a reduction in the debt balances using cash received from the Brickhaven deemed termination payment received during the nine months ended September 30, 2019. These decreases were partially offset by an increase in the mark-to-market expense associated with the change in the fair value of our interest rate swap.
Income from Equity Method Investment. Income from equity method investment decreased $0.2 million, or 9.1%, for the nine months ended September 30, 2019
to $1.9 million as compared to $2.1 million for the nine months ended September 30, 2018. The slight decrease period-over-period was primarily attributable to a reduction in ash volumes generated by the utility and available for sale by us.
Net Loss. Net loss increased $10.5 million, or 91.2%, for the nine months ended September 30, 2019 to $21.9 million
as compared to $11.5 million for the nine months ended September 30, 2018. The increase was primarily attributable to lower gross profit, partially offset by the decrease in general and administrative expenses and interest expense, net discussed above and the change in the income tax benefit of $4.7 million.
Liquidity and Capital Resources
Our primary sources of liquidity and capital resources are cash flows generated by operating activities and borrowings under the Credit Facility. In part due to longer sales cycles, driven by the increase in the size, scope and complexity of
remediation and compliance projects that we are bidding on, we have experienced unexpected contract initiation delays and project completion delays which have adversely affected our revenue and overall liquidity. Our lengthy and complex projects require us to expend large sums of working capital, and delays in payment receipts, project commencement or project completion can adversely affect our financial position and the cash flows that normally would fund our expenditures. But for the Amendment (as defined below), as of June 30, 2019, we would not have been in compliance with the requirement to maintain a consolidated net leverage ratio (as defined in the Credit Agreement) of 3.75 to 1.00 under the Credit Facility. On August 13, 2019, we entered into the Amendment, pursuant to
which, among other things, the lenders agreed to waive such non-compliance. In addition, pursuant to the terms of the Amendment, the Credit Facility was amended to revise the required financial covenant ratios such that, after giving effect to the Amendment, we are not required to comply with any financial covenants through March 30, 2020. The Amendment also added a requirement to make two additional scheduled prepayments of outstanding loans under the Credit Facility, including a payment of $50.0 million on or before September 13, 2019, and an additional payment of $40.0 million on or before March 31, 2020. We made the $50.0 million payment prior to September 13, 2019, using the payment collected related to the early completion of the Brickhaven deemed termination. See
“—Our Debt Agreements—Existing Credit Facility” below for more information about the Credit Facility and the Amendment.
As of September 30, 2019, we had approximately $7.6 million in cash. If our liquidity is not sufficient to satisfy our debt payment obligations under the Amendment or our planned operations from cash on hand, cash generated from operations, and our existing credit facilities, we may need to alter our operating activities, access additional related party funding, or consider other sources of liquidity, such as refinancing all or part of our existing debt, selling assets, borrowing additional funds or issuing additional equity and debt, which we may not be able to do on commercially reasonable terms or at all.
31
Cash
Flows
The following table sets forth our cash flow data:
Nine Months Ended
September 30,
Change
2019
2018
$
(dollars
in thousands)
Cash flows provided by (used in) operating activities
$
70,175
$
(10,504
)
$
80,679
Cash flows used in investing
activities
(12,000
)
(33,665
)
21,665
Cash flows (used in) provided by financing activities
(57,489
)
15,886
(73,375
)
Net
change in cash
$
686
$
(28,283
)
$
28,969
Operating Activities
Net cash provided by (used in) operating activities increased $80.7
million for the nine months ended September 30, 2019 to $70.2 million of net cash provided by operating activities as compared to $10.5 million of net cash used in operating activities for the nine months ended September 30, 2018. The change in cash flows provided by (used in) operating activities was primarily attributable to the $80.0 million payment from the Brickhaven deemed termination received during the nine months ended September 30, 2019 and a decrease of $10.7 million in
cash paid for interest due to the debt re-financing during the nine months ended September 30, 2018. These decreases were partially offset by an increase in net loss of $10.5 million.
Investing Activities
Net cash used in investing activities decreased $21.7 million for the nine months ended September 30, 2019 to $12.0 million as compared to $33.7 million for the nine months ended September 30, 2018.
The change in cash flows used in investing activities was primarily attributable to $20.0 million used for business acquisitions in March 2018, net of cash received, and a decrease in capital expenditures, net of proceeds, of $1.7 million.
Financing Activities
Net cash (used in) provided by financing activities decreased $73.4 million for the nine months ended September 30, 2019 to $57.5 million of net cash used in financing activities as compared to $15.9 million of net cash provided by financing activities for the nine
months ended September 30, 2018. The change in cash flows provided by financing activities was primarily attributable to the $59.2 million in proceeds received in the nine months ended September 30, 2018 from the issuance of common stock resulting from our IPO and $8.9 million in debt offering costs paid during the nine months ended September 30, 2018, partially offset by a net increase of $23.2 million in debt related payments during the nine months ended September 30, 2019.
Working
Capital
Our working capital, which we define as total current assets less total current liabilities, totaled a working capital deficit of $44.8 million and working capital of $74.1 million at September 30, 2019 and December 31, 2018, respectively. This decrease in net working capital for the nine months ended September 30, 2019 was primarily due to decreases in inventory resulting from the timing of activities between periods, decreases in costs and estimated earnings in excess of billings resulting from the billing of the Brickhaven deemed termination
payment and increases in notes payable, current maturities, related to the Amendment, partially offset by an increase in trade accounts receivable resulting from the timing of payments.
Our Debt Agreements
Former Credit Agreement
On October 25, 2017, we entered into a credit agreement (the “2017 Credit Agreement”) by and among us, the lenders party thereto from time to time and Regions Bank, as administrative agent. The 2017 Credit Agreement provided for a revolving credit facility (the “2017 Credit Facility”) with a principal amount of up to $45.0 million. The 2017 Credit Facility permitted extensions of credit up to the lesser of $45.0 million and a borrowing base that was calculated by us based upon a percentage of the value of our eligible accounts receivable and eligible
inventory and approved by the administrative agent.
The interest rates per annum applicable to the loans under the 2017 Credit Facility were based on a fluctuating rate of interest measured by reference to, at our election, either (i) an adjusted London Inter-bank Offered Rate (“LIBOR”) plus a 2.00% borrowing margin or (ii) an alternative base rate plus a 1.00% borrowing margin. Customary fees were payable in respect of the 2017 Credit Facility and included (a) commitment fees in an amount equal to 0.50% of the daily unused portions of the 2017 Credit Facility and (b) a 2.00% fee on outstanding letters of credit. The 2017 Credit Facility contained various representations and
32
warranties and restrictive
covenants. If excess availability under the 2017 Credit Facility fell below the greater of 15% of the loan cap amount or $6.75 million, we were required to comply with a minimum fixed charge coverage ratio of 1.0 to 1.0. The 2017 Credit Facility did not otherwise contain financial maintenance covenants.
The 2017 Credit Facility had a scheduled maturity date of October 25, 2022; however, all amounts outstanding were repaid in September 2018 as a result of the refinancing discussed below.
Former CS Term Loan
On October 25, 2017, we entered into a credit agreement by and among us, the lenders party thereto from time to time and Credit Suisse AG, Cayman Islands Branch, as administrative agent, providing for a term loan (the “2017 CS
Term Loan”) with an initial commitment of $250.0 million. The 2017 CS Term Loan provided that we had the right at any time to request incremental term loans up to the greater of (i) the excess, if any, of $25.0 million over the aggregate amount of all incremental 2017 Credit Facility commitments and incremental 2017 CS Term Loan commitments previously utilized and (ii) such other amount so long as such amount at such time could be incurred without causing the pro forma consolidated secured leverage ratio to exceed 3.25 to 1.00.
The interest rates per annum applicable to the loans under the 2017 CS Term Loan were based on a fluctuating rate of interest measured by reference to, at our election, either (i) LIBOR plus a 6.25% borrowing margin or (ii) an alternative base rate plus a 5.25% borrowing margin. The 2017 CS Term Loan contained various representations and warranties and restrictive covenants. In addition, we were
required to comply with a maximum senior secured net leverage ratio of 5.00 to 1.00 beginning March 31, 2018, decreasing to 4.50 to 1.00 as of March 31, 2019, and further decreasing to 4.00 to 1.00 as of March 31, 2020 and thereafter. The principal amount of the 2017 CS Term Loan amortized at a rate of 7.5% per annum with all remaining outstanding amounts under the 2017 CS Term Loan due on the 2017 CS Term Loan maturity date. We received net proceeds from the IPO of $59.2 million prior to deducting offering expenses. We used these net proceeds to pay offering expenses and to pay off $40.0 million of the borrowings outstanding under the 2017 CS Term Loan, which would otherwise have been required through June 2020.
The 2017 CS Term Loan had a scheduled maturity date of October
25, 2024; however, all amounts outstanding were repaid in September 2018 as a result of the refinancing discussed below.
Existing Credit Facility
On September 21, 2018, we entered into a credit agreement (the “Credit Facility”) by and among us, the lenders party thereto from time to time and Bank of America, as administrative agent (the “Administrative Agent”). The Credit Facility includes:
•a revolving loan not to exceed $50.0 million (the “Revolving Loan”);
•a term loan of $205.0 million (the “Closing Date Term Loan”); and
•
a
commitment to loan up to a further $25.0 million in term loans, which expires in March 2020 (the “Delayed Draw Commitment” and the term loans funded under such Delayed Draw Commitment, the “Delayed Draw Term Loan”, together with the Closing Date Term Loan, the “Term Loan”).
All amounts associated with the Revolving Loan and the Term Loan under the Credit Facility mature in September 2023 The interest rates per annum applicable to the loans under the Credit Facility are based on a fluctuating rate of interest measured by reference to, at our election, either (i) the Eurodollar rate, currently LIBOR, or (ii) an alternative base rate. Various margins are added to the interest rate based upon our consolidated net leverage ratio. Customary fees are payable in respect of the Credit Facility and include (i) commitment fees for unused portions of the Credit Facility and (ii) fees on outstanding
letters of credit. Amounts borrowed under the Credit Facility are secured by essentially all of the assets of the Company.
The Credit Facility contains various representations and warranties, and restrictive covenants that, among other things and subject to specified exceptions, restrict the ability of us and our restricted subsidiaries to grant liens, incur indebtedness (including guarantees), make investments, engage in mergers and acquisitions, make dispositions of assets, make restricted payments or change the nature of our or their business. The Credit Facility contains financial covenants related to the consolidated net leverage ratio and the fixed charge coverage ratio (as defined in the Credit Facility). The restricted covenants after giving
effect to Amendment No. 2 to Credit Agreement and Waiver (the “Amendment”) are described more fully below.
The Credit Facility also contains certain affirmative covenants, including reporting requirements, such as delivery of financial statements, certificates and notices of certain events, maintaining insurance and providing additional guarantees and collateral in certain circumstances.
The Credit Facility includes customary events of default including non-payment of principal, interest or fees, violation of covenants, inaccuracy of representations or warranties, cross default to certain other material indebtedness, bankruptcy and insolvency events, invalidity or impairment of guarantees or security interests, material judgments and change of control.
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The
Revolving Loan provides a principal amount of up to $50.0 million reduced by outstanding letters of credit. As of September 30, 2019, $10.2 million was outstanding on the Revolving Loan and $12.0 million of letters of credit were outstanding.
But for the Amendment, as of June 30, 2019, we would not have been in compliance with the requirement to maintain a consolidated net leverage ratio of 3.75 to 1.00 under the Credit Facility. On August 13, 2019, we entered into the Amendment, pursuant to which, among other things, the required lenders agreed to waive such non-compliance.
In
addition, pursuant to the terms of the Amendment, the Credit Facility was amended to revise the required financial covenant ratios such that, after giving effect to the Amendment, we are not required to comply with any financial covenants through March 30, 2020. After March 30, 2020, we will be required to comply with a consolidated net leverage ratio of 6.50 to 1.00 from March 31, 2020 through September 29, 2020, decreasing to 3.00 to 1.00 as of September 30, 2020 and thereafter. After giving effect to the Amendment, we will also be required to comply with a fixed charge coverage ratio of 0.75
to 1.00 as of March 31, 2020, 0.90 to 1.00 as of June 30, 2020 and 1.20 to 1.00 thereafter. In the event that we are unable to comply in the future with such financial covenants upon delivery of our financial statements pursuant to the terms of the Credit Facility, an Event of Default will have occurred and the Administrative Agent can then, following a specified cure period, declare the unpaid principal amount of all outstanding loans, all interest accrued and unpaid thereon, and all other amounts payable to be immediately due and payable by the Company.
As consideration for the accommodations described above, we have agreed that amounts borrowed pursuant
to the Delayed Draw Commitment will not exceed $15.0 million at any one time outstanding (without reducing the overall Delayed Draw Commitment amount). In addition, any Delayed Draw Term Loans shall incur additional interest at a rate equal to 10.0% per annum on all amounts outstanding in excess of $10.0 million of Delayed Draw Term Loans. Further, the margin of interest that will be charged on all outstanding loans has been increased to 4.00% for loans based on LIBOR and 3.00% for loans based on the alternative base rate. The Amendment revised the amount of (i) the commitment fees to 0.35% at all times for unused portions of the Credit Facility and (ii) fees on outstanding letters of credit to 3.35%
at all times. The Amendment also added a requirement to make two additional scheduled prepayments of outstanding loans under the Credit Facility, including a payment of $50.0 million on or before September 13, 2019 and an additional payment of $40.0 million on or before March 31, 2020.
The $50.0 million payment was made prior to September 13, 2019, using the payment collected related to the early completion of the Brickhaven deemed termination. Regarding the March 2020 debt payment of $40.0 million, management has evaluated its ability to make this payment
and meet our other financial obligations using our most recent financial forecast, which includes consideration of projected cash flows from operations, anticipated availability under the Credit Facility and prudent working capital management. The financial forecast does not anticipate incurring material unexpected losses in existing operations or new work awards being materially delayed. Though management believes that the Company will not be able to make the $40.0 million payment due in March 2020 and meet our other obligations as they become due over the next year based solely on projected cash flows from operations, anticipated availability under the revolving credit facility and prudent working capital management, we expect to execute transactions and/or utilize other sources of funding that provide additional liquidity necessary to
meet our obligations as they become due.
We are actively pursuing, with authority from the Board of Directors, a variety of strategic transactions and cost-cutting measures, including, but not limited to, asset divestitures, alternative sources of capital, reduction in corporate discretionary expenditures and capital expenditures, and other operational efficiencies. We believe it is probable that these measures, as we continue to implement them, will enable us to make this payment and meet our other obligations as they become due through at least 12 months from the date that these financial statements were issued. If these initiatives are not successful or other unanticipated headwinds in our business occur, the Company could be required to amend or obtain a waiver from the Administrative Agent, and there is no assurance that we could obtain
such amendment or waiver. If we are unable to complete such initiatives by the required debt payment due dates and we are unable to obtain an amendment or waiver from the Administrative Agent, the Company has the ability to access additional related party funding.
The Amendment also includes revisions to the restrictive covenants, including removing certain exceptions to the restrictions on our ability to make acquisitions, to make investments and to make dividends or other distributions. After giving effect to the Amendment, we will not be permitted to make any distributions or dividends to our stockholders without the consent of the required lenders.
Equipment Financing Facilities
We have entered into various equipment financing
arrangements to finance the acquisition of certain equipment (the “Equipment Financing Facilities”). As of September 30, 2019, we had equipment lines of credit allowing borrowings of $4.0 million, of which $1.5 million was utilized. In addition, we had $34.6 million of equipment notes outstanding as of September 30, 2019. Each of the Equipment Financing Facilities includes non-financial covenants, and, as of September 30, 2019, we were in compliance with these covenants.
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Non-GAAP
Financial Measures
Adjusted EBITDA and Adjusted EBITDA Margin
Adjusted EBITDA and Adjusted EBITDA margin are not financial measures determined in accordance with GAAP.
We define Adjusted EBITDA as net loss before interest expense, income taxes, depreciation and amortization, equity-based compensation, non-recurring legal costs and expenses and start-up costs, the Brickhaven contract deemed termination revenue reversal, and transaction-related expenses and other items. Adjusted EBITDA margin represents the ratio of Adjusted EBITDA to total revenue.
We believe Adjusted EBITDA and Adjusted EBITDA margin are useful performance measures because they allow for an effective evaluation
of our operating performance when compared to our peers, without regard to our financing methods or capital structure. We exclude the items listed above from net loss in arriving at Adjusted EBITDA because these amounts are either non-recurring or can vary substantially within our industry depending upon accounting methods and book values of assets, capital structures and the method by which the assets were acquired. Adjusted EBITDA should not be considered as an alternative to, or more meaningful than, net loss determined in accordance with GAAP. Certain items excluded from Adjusted EBITDA are significant components in understanding and assessing a company’s financial performance, such as a company’s cost of capital and tax structure, as well as the historic costs of depreciable assets, none of which are reflected in Adjusted EBITDA. Our presentation of Adjusted EBITDA should not be construed as an indication that our results will be unaffected by the items excluded
from Adjusted EBITDA. Our computations of Adjusted EBITDA may not be identical to other similarly titled measures of other companies. We use Adjusted EBITDA margin to measure the success of our business in managing our cost base and improving profitability. The following table presents a reconciliation of Adjusted EBITDA to net loss, our most directly comparable financial measure calculated and presented in accordance with GAAP, along with our Adjusted EBITDA margin.
Represents non-recurring legal costs and expenses, which amounts are not representative of those that we historically incur in the ordinary course of our business.
Negative amounts represent insurance recoveries related to these matters.
(2)
Represents non-recurring start-up costs associated with the startup of Allied and our nuclear services offerings, including the setup of financial operations systems and modules, pre-contract expenses to obtain initial contracts and the hiring of operational staff. Because these costs are associated with the initial setup of the Allied business to initiate the operations involved in our nuclear services offerings, these costs are non-recurring in the normal course of our business.
(3)
Represents
SCB transaction expenses, executive severance costs, IPO-related costs, expenses associated with the Amendment to the Credit Facility and other miscellaneous items.
(4)
Adjusted EBITDA margin is a non-GAAP financial measure that represents the ratio of Adjusted EBITDA to total revenue. We use Adjusted EBITDA margin to measure the success of our businesses in managing our cost base and improving profitability.
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Off-Balance Sheet Arrangements
We currently have no material
off-balance sheet arrangements.
Contractual Obligations
As of September 30, 2019, there have been no material changes in our outstanding contractual obligations from those disclosed within Part II, “Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operation,” in our Annual Report on Form 10-K for the year ended December 31, 2018.
Critical Accounting Policies and Estimates
There were no changes to our critical accounting policies from those disclosed in our Annual Report on Form 10-K for the year ended December
31, 2018.
Recent Accounting Pronouncements
Please see Note 2, “Recent Accounting Pronouncements,” to the accompanying unaudited condensed consolidated and combined financial statements included elsewhere in this Quarterly Report and Note 2, “Summary of Significant Accounting Policies,” to the consolidated and combined financial statements in our Annual Report on Form 10-K for the year ended December 31, 2018 for a discussion of recent accounting pronouncements.
Under the Jumpstart Our Business Startups Act (the “JOBS Act”), we meet the definition of an “emerging
growth company,” which allows us to have an extended transition period for complying with new or revised financial accounting standards pursuant to Section 107(b) of the JOBS Act. We intend to take advantage of all of the reduced reporting requirements and exemptions, including the longer phase-in periods for the adoption of new or revised financial accounting standards under Section 107 of the JOBS Act until we are no longer an emerging growth company.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market risk is the risk of loss arising from adverse changes in market rates and prices. Currently, our market risks relate to potential changes in the fair value of our long-term debt due to fluctuations in applicable market interest rates. Going forward, our market risk exposure generally
will be limited to those risks that arise in the normal course of business, as we do not engage in speculative, non-operating transactions, nor do we utilize financial instruments or derivative instruments for trading purposes.
Interest Rate Risk
As of September 30, 2019, we had $154.8 million of debt outstanding under the Term Loan and Delayed Draw Commitment and $10.2 million of debt outstanding under the Revolving Loan, with an interest rate of 6.0%. A 1.0% increase or decrease in the interest rate would increase or decrease interest expense by approximately $1.6 million per year assuming a consistent debt balance and before taking into consideration any impact from our interest rate cap. We
currently have entered into derivatives contracts to put an interest rate cap in place with respect to outstanding indebtedness under the Term Loan that provides a ceiling on three-month LIBOR at 2.5% for a notional amount of $150.0 million.
On August 13, 2019, we entered into the Amendment to the Credit Facility, pursuant to which, among other things, (i) any Delayed Draw Term Loans incurred under the Credit Facility shall incur additional interest at a rate equal to 10.0% per annum on all amounts outstanding in excess of $10.0 million of Delayed Draw Term Loans and (ii) the margin of interest that will be charged on all outstanding loans under the Credit Facility has been increased to 4.00% for loans based on LIBOR and 3.00%
for loans based on the alternative base rate.
Credit Risk
While we are exposed to credit risk in the event of non-performance by counterparties, the majority of our customers are investment grade companies and we do not anticipate non-performance. We mitigate the associated credit risk by performing credit evaluations and monitoring the payment patterns of our customers.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of our disclosure controls and procedures
(as defined in Rules 13a-15(e) and 15d‑15(e) of the Exchange Act) as of the end of the period covered by this Quarterly Report. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives. Based on such evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of September 30, 2019, at the reasonable assurance level.
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Changes in Internal Control Over Financial Reporting
There
were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rules 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the quarter ended September 30, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
We are party to a
lawsuit filed against North Carolina by an environmental advocacy group alleging that the issuance by the state of certain permits associated with our Brickhaven clay mine reclamation site exceeded the state’s power. Although the state’s authority to issue the bulk of the permits (i.e., the allowance to reclaim the original site with coal ash) was upheld, the portion of the permits that allows us to “cut and prepare” an additional portion of the site was held by the North Carolina Superior Court to exceed the relevant agency’s statutory authority. The North Carolina Superior Court’s decision was reversed and remanded back to the North Carolina Office of Administrative Hearing. Dispositive motions filed by us and the North Carolina Department of Environmental Quality are pending before the North Carolina Office of Administrative Hearing. All customer related work at the Brickhaven site has been completed.
Allied and its
affiliate, Allied Power Resources, LLC, have been named in a collective action lawsuit filed in the U.S. District Court for the Northern District of Illinois, alleging violations of the Fair Labor Standards Act, and which includes related class claims alleging violations of the Illinois Minimum Wage Law and the Pennsylvania Minimum Wage Act for failure to pay overtime. This case is one of a series filed against companies in the oil, gas and energy industries in Illinois and Texas. The parties mediated this case in November 2018 and reached a settlement, contingent upon court approval. The parties are working to finalize the joint motion to approve the settlement to submit to the court for approval.
In addition to the above matters, we are from time to time party to various lawsuits, claims and other legal proceedings that arise in the ordinary course of our business. With respect to all such lawsuits, claims and proceedings,
we record reserves when it is probable a liability has been incurred and the amount of loss can be reasonably estimated. Although it is difficult to predict the ultimate outcome of these lawsuits, claims and proceedings, we do not believe that the ultimate disposition of any of these matters, individually or in the aggregate, would have a material adverse effect on our results of operations, financial position or cash flows. We maintain liability insurance for certain risks that is subject to certain self-insurance limits.
Item 1A. Risk Factors
For a detailed discussion of known material factors which could materially affect our business, financial condition or future results, refer to Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December
31, 2018 (the “Annual Report”). There have been no material changes in our risk factors from those included in the Annual Report, except as noted below.
We rely on technology in our business and any technology disruption or delay in implementing new technology could adversely affect our business.
We believe investments in new technology and processes present opportunities to provide higher-margin offerings while also improving the environment. We also depend on digital technologies to process and record financial and operating data and rely on sophisticated information technology systems and infrastructure to support our business, including process control technology. The failure of our technology initiatives and systems to perform as we anticipate or a delay in implementing new technology could adversely affect our financial condition, results of
operations and cash flows. For example, within our byproduct sales offerings, which is part of our Environmental Solutions segment, the roll-out of our technology initiatives, including our MP618 thermal beneficiation technology and our grinding technology, has been slower than previously anticipated, resulting in lower than expected contribution to operating results.
Additionally, if competitors implement new technologies before we do, allowing such competitors to provide lower priced or enhanced services of superior quality compared to those we provide, this could have an adverse effect on our financial condition, results of operations and cash flows.
Our financial condition and results of operations could suffer and be adversely affected if we incur an impairment of goodwill or other intangible assets.
We are required to test goodwill
and other intangible assets annually and on an interim basis if an event occurs or there is a change in circumstance that would more likely than not reduce the fair value of our reporting unit below its carrying value or that indicates that the carrying value of such intangible asset is not recoverable. When the carrying value of a reporting unit exceeds its fair value, a charge to operations, up to the total amount of the intangible, is recorded. If the carrying amount of an intangible asset is not recoverable, a charge to operations is recognized. Either event would result in incremental expenses for that period, which would reduce any earnings or increase any loss for the period in which the impairment was determined to have occurred.
The valuation used to test goodwill for impairment is dependent upon a number of significant estimates and assumptions, including macroeconomic conditions, growth rates, competitive activities,
cost containment, margin expansion and our business plans. We believe these estimates and assumptions are reasonable. However, future changes in the judgments, assumptions and
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estimates that are used in our impairment testing for goodwill, including discount and tax rates or future cash flow projections, could result in significantly different estimates of the fair values. As a result of these factors and the related cushion as of the date of the previous annual impairment test, goodwill for the Environmental Solutions reporting unit is more susceptible to impairment risk. If the assumptions used in our analysis are not realized, it is possible that an impairment charge may need to be recorded in the future which could have a material adverse effect on
our financial condition and results of operations.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
