Advanced Emissions Solutions Reports Fourth Quarter and Full Year 2017 Results

03/12/2018
Higher Refined Coal Distributions, Royalty Income and Shareholder Return Initiatives Highlight Year with Pre-Tax Income of $52.0 million and diluted EPS of $1.29

HIGHLANDS RANCH, Colo., March 12, 2018 (GLOBE NEWSWIRE) -- Advanced Emissions Solutions, Inc. (NASDAQ:ADES) (the "Company" or "ADES") today filed its Annual Report on Form 10-K and reported financial results for the fourth quarter and full year ended December 31, 2017, including information about its equity investment in Tinuum Group, LLC ("Tinuum Group") and Tinuum Services, LLC ("Tinuum Services") (collectively "Tinuum"), of which ADES owns 42.5% and 50%, respectively.   

Tinuum & Refined Coal (“RC”) Highlights
•  Tinuum distributions to ADES were $16.5 million for the fourth quarter, up 12% from the prior year quarter, and $53.5 million for full year 2017, a 16% year-over-year increase
•  Royalty earnings from Tinuum Group were $3.2 million for the fourth quarter and $9.7 million for full year 2017, year-over-year increases of 47% and 58%, respectively
•  Tinuum Group invested tonnage was 13.3 million for the fourth quarter and 46.9 million for full year 2017
•  RC Segment operating income was $59.9 million for full year 2017, an increase of $8.6 million, or 17%, from full year 2016
•  Based on invested RC facilities as of December 31, 2017, the Company reaffirms its recently updated expected future net RC cash flows to ADES to be between $275 million and $300 million through year end 2021
•  As previously announced, during November 2017, Tinuum Group completed a sale to a third-party investor of two RC projects at coal-burning power plants that have each historically burned in excess of 3.5 million tons of coal per year and are royalty bearing to ADES, thus increasing the number of invested facilities to 17

ADES Consolidated Highlights
•  Recognized consolidated revenue of $0.5 million during the fourth quarter and $35.7 million for full year 2017
•  General and administrative operating costs (i.e., non-cost of revenue expenses) were $4.2 million for the fourth quarter and $17.6 million for full year 2017; a reduction of over 22% and 35%, respectively, from the comparable periods in 2016 
•  Consolidated net income was $7.0 million for the fourth quarter and $27.9 million for full year 2017; pretax income was $18.5 million for the fourth quarter and $52.0 million for full year 2017
•  The Company recorded income tax expense of $11.5 million and $24.2 million during the fourth quarter and full year, respectively, driven by federal and state taxes, including the effects of the Tax Cuts and Jobs Act (the "Tax Act") 
•  Ended 2017 with a cash balance of $30.7 million, an increase of $3.9 million since September 30, 2017
•  Returned $32.1 million to shareholders in 2017 through capital allocation initiatives

L. Heath Sampson, President and CEO of ADES commented, “At the beginning of 2017, we laid out a comprehensive set of goals and priorities for the Company. Among these priorities were: 1) the continued focus on helping Tinuum obtain tax equity investors for its remaining RC facilities; 2) completing the remaining EC equipment contracts on time, on schedule and on budget; 3) capturing an increased share of the mercury control consumables market and building out the viability of our chemicals business; 4) evaluating potential M&A opportunities within the fossil fuel power market; and 5) executing our capital allocation program to distribute and create value for our shareholders. First, we assisted Tinuum in obtaining tax equity investors for four additional RC facilities and completed equipment contracts of our legacy EC business on time, on schedule and on budget.  Although the mercury control market has proven to be more competitive than we originally expected as we continue to witness broad pricing decreases due to over supply, and the uptake of our emerging specialty chemicals business was slower than we had anticipated, we did see higher full-year chemicals revenue year-over-year. As a team and with our advisors, we evaluated several potential acquisition opportunities, but remained disciplined, not finding companies that met our explicitly-stated criteria at a value we deemed appropriate.  Finally, we returned over $32 million to shareholders in 2017 through ADES' first ever recurring quarterly dividend, our ongoing open-market buyback program and a successful modified Dutch tender offer.”

Sampson continued, “The fourth quarter, marked by one of the highest amounts of Tinuum distributions to ADES and the navigation of an uncertain tax reform environment, was an affirmation of our RC business and the critical role that Tinuum’s refined coal facilities play in the advancement of the U.S.’s clean energy needs. The year was also highlighted by the IRS issuance of the technical advice memorandum in the spring combined with many of the other political and tax headwinds being lifted from the coal industry. These favorable dynamics resulted in both higher royalties and distributions from Tinuum as well as a strengthened pipeline of potential tax-equity investors. In addition, despite recent contract wins within the EC business, we concluded the growth and ultimate potential of our existing product offerings in power plant emissions control are not large enough as a standalone set of products due to the smaller-than-estimated North American market and undeveloped international market. Therefore, we are updating our priorities to support Tinuum, while maintaining the longer-term option to monetize our tax assets and public platform. Our chemical technologies and knowledge are important to the future of refined coal; as such, we will opportunistically reduce expenses, and appropriately allocate resources from EC and corporate to be more focused on supporting refined coal. Additionally, we will be strategic in our pursuit of the deployment of chemical revenues to cover a portion of our expenses and maintain the assets for other strategic alternatives.”

Fourth Quarter & Full Year Results

Fourth quarter revenues and costs of revenues were $0.5 million and $0.6 million, compared with $3.6 million and $3.5 million respectively, in the fourth quarter of 2016. Full year 2017 revenues and costs of revenues were $35.7 million and $31.9 million, compared with $50.6 million and $39.8 million, respectively, for full year 2016. The decrease in revenues during both the fourth quarter and full year 2017 was primarily the result of the expected completion of fewer equipment contracts as the regulatory deadline for compliance has passed, partially offset by an overall increase in chemical sales.

Fourth quarter other operating expenses were $4.2 million, a decrease of 22% compared to $5.4 million in the fourth quarter of 2016. Full year other operating expenses were $17.6 million, a decrease of 35% compared to $26.9 million for full year 2016. The decreases during both the fourth quarter and full year 2017 were primarily the result of cost containment initiatives. The full year results were also positively impacted by the conclusion of our restatement efforts in the first half of 2016.

Fourth quarter earnings from equity method investments were $17.8 million, compared to $15.5 million for the fourth quarter of 2016. Full year earnings from equity method investments were $53.8 million, compared to $45.6 million for full year 2016.

Fourth quarter royalty earnings from Tinuum Group were $3.2 million, compared to $2.2 million for the fourth quarter of 2016. Full year royalty earnings from Tinuum Group were $9.7 million, compared to $6.1 million for full year 2016. Both fourth quarter and full year 2017 increases were the result of an increase in invested RC facilities, RC tonnage and royalty earnings per ton.

Fourth quarter interest expense was $1.0 million, compared to $0.6 million for the fourth quarter of 2016. Full year interest expense was $3.0 million, compared to $5.1 million for full year 2016. The fourth quarter increase from 2016 is a result of an increase in 453A interest expense due to an increase in invested RC facilities. The full year decrease from 2016 was the result of the payoff of a credit facility during June 2016.

Income tax expense for the fourth quarter was $11.5 million, compared to a benefit of $61.7 million for the fourth quarter of 2016. The full year tax expense was $24.2 million, compared to a benefit of $60.9 million for full year 2016. The full year 2017 impacts were the result of statutory federal and state taxes of $19.9 million as well as the incremental impacts of the Tax Act of $5.8 million.

Net income for the fourth quarter was $7.0 million, compared to net income of $75.8 million for the fourth quarter of 2016. Net income for the full year was $27.9 million, compared to net income of $97.7 million for full year 2016.  The decrease in net income for both the fourth quarter and the full year 2017 was primarily driven by the release of a portion of our previously recorded deferred tax asset valuation allowance in the fourth quarter of 2016, offset by higher equity income from the RC business and significantly reduced operating expenses.

As of December 31, 2017, the Company had cash and cash equivalents of $30.7 million, an increase of 132% compared to $13.2 million as of December 31, 2016, including the impact of capital allocation initiatives of $32.1 million. The Company also had no current or long-term restricted cash as of December 31, 2017, compared to $13.7 million as of December 31, 2016.

Tax Reform

There were a number of significant changes within the recently enacted Tax Act. Overall, the final Tax Act reinforced tax credits derived from the production and sale of refined coal, which is critical to Tinuum Group. The impact of the Base Erosion Anti-Abuse Tax (“BEAT”) has some ambiguity, but importantly, investors that are impacted by BEAT are still able to appropriately use refined coal tax credits; however, their margin related to those credits may be impacted. Further, lower corporate tax rates reduce the total project margins available in a refined coal transaction as the expenses of the projects are worth less in tax benefits. However, we believe the Tax Act eliminates the market uncertainty of what tax reform would bring. It provides additional clarity to the large majority of potential investors in Tinuum's pipeline, and has the potential to open up new prospective tax-equity investors in Tinuum’s ongoing focus to lease or sell its remaining refined coal facilities.

The Company's assessment and accounting for the income tax effects of the Tax Act affecting its consolidated financial statements is generally complete, subject to continued evaluation during 2018, and as such, the Company recorded an adjustment to its recorded deferred tax assets and deferred tax liabilities from 35 percent to 21 percent as of the effective date of the Tax Act.  Accordingly, the Company recorded a reduction of $5.8 million to its net deferred tax assets with a corresponding entry to deferred tax expense for the year ended December 31, 2017 for those temporary differences expected to reverse. Additionally, due to changes to forecasts of future utilization of deferred tax assets related to the effects of the Tax Act, somewhat offset by the positive impacts of additional invested RC facilities, the Company decreased its deferred tax asset valuation allowance by $0.5 million as of December 31, 2017.

2018 Outlook

Sampson added, “We enter 2018 with growing confidence in both our pipeline of potential RC tax equity investors and the strength of projected cash flows that our currently invested RC facilities will provide. These strong, predictable cash flows will continue to support our capital allocation plan, which includes the ongoing focus on delivering shareholder value through our dividend program and opportunistic share buybacks. We believe the passage of tax reform in late December provides supportive clarity for our RC segment and, in addition to obtaining tax equity investors for two RC facilities in November 2017, has reaffirmed our recently updated expected future cash flows at ADES from our Tinuum investments, net of taxes and applicable interest charges as of December 31, 2017, to a range between $275 million and $300 million through 2021.  This is an increase of over 20% compared to our prior forecast at the end of September 2017.”

Conference Call and Webcast Information

The Company has scheduled a conference call to begin at 9:00 a.m. Eastern Time on Tuesday, March 13, 2018.  The conference call will be webcast live via the Investor section of ADES's website at www.advancedemissionssolutions.com. Interested parties may also participate in the call by dialing (833) 227-5845 (Domestic) or (647) 689-4072 (International) conference ID 8970009. A supplemental investor presentation will be available on the Company's investor relations website prior to the start of the conference call.

About Advanced Emissions Solutions, Inc.
Advanced Emissions Solutions, Inc. serves as the holding entity for a family of companies that provide emissions solutions to customers in the power generation and other industries.

ADA-ES, Inc. (“ADA”) is a wholly-owned subsidiary of Advanced Emissions Solutions, Inc. (“ADES”) that provides emissions control solutions for coal-fired power generation and industrial boiler industries. With more than 25 years of experience developing advanced mercury control solutions, ADA delivers proprietary environmental technologies, equipment and specialty chemicals that enable coal-fueled boilers to meet emissions regulations. These solutions enhance existing air pollution control equipment, maximizing capacity and improving operating efficiencies. Our track record includes securing more than 40 US and international patents for emissions control technology and systems and selling the most activated carbon injection systems for power plant mercury control in North America. For more information on ADA, and its products and services, visit www.adaes.com.  

Tinuum Group, LLC (“Tinuum Group”) is a 42.5% owned joint venture by ADA that provides ADA’s patented Refined Coal (“RC”) CyClean™ technology to enhance combustion of and reduce emissions of NOx and mercury from coals in cyclone boilers and ADA’s patented M-45™ and M-45-PC™ technologies for Circulating Fluidized Bed boilers and Pulverized Coal boilers respectively.

Caution on Forward-Looking Statements
This press release contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, which provides a “safe harbor” for such statements in certain circumstances. The forward-looking statements include projection on future RC cash flows, and expectations about potential transactions with tax-equity investors, planned expense reduction initiatives, as well as future acquisition activity. These forward-looking statements involve risks and uncertainties. Actual events or results could differ materially from those discussed in the forward-looking statements as a result of various factors including, but not limited to, timing of new and pending regulations and any legal challenges to or extensions of compliance dates of them; the US government’s failure to promulgate regulations or appropriate funds that benefit our business; changes in laws and regulations, accounting rules, prices, economic conditions and market demand; impact of competition; availability, cost of and demand for alternative energy sources and other technologies; technical, start up and operational difficulties; failure of the RC facilities to produce RC; inability to sell or lease additional RC facilities; termination of or amendments to the contracts for sale or lease of RC facilities; decreases in the production of RC; inability to commercialize our technologies on favorable terms; our liability to identify and complete appropriate acquisition opportunities; loss of key personnel; potential claims from any terminated employees, customers or vendors; failure to satisfy performance guarantees; availability of materials and equipment for our businesses; intellectual property infringement claims from third parties; as well as other factors relating to our business, as described in our filings with the SEC, with particular emphasis on the risk factor disclosures contained in those filings. You are cautioned not to place undue reliance on the forward-looking statements and to consult filings we have made and will make with the SEC for additional discussion concerning risks and uncertainties that may apply to our business and the ownership of our securities. The forward-looking statements speak only as to the date of this press release.

Source: Advanced Emissions Solutions, Inc.

Investor Contact:

Alpha IR Group
Chris Hodges or Ryan Coleman
312-445-2870
ADES@alpha-ir.com

 

TABLE 1

Advanced Emissions Solutions, Inc. and Subsidiaries
Consolidated Balance Sheets
    As of December 31,
 
(in thousands, except share data)  2017   2016
ASSETS
       
Current assets:        
Cash and cash equivalents   $ 30,693     $ 13,208  
Restricted cash       13,736  
Receivables, net   1,113     8,648  
Receivables, related party   3,247     1,934  
Prepaid expenses and other assets   1,835     1,382  
Total current assets   36,888     38,908  
Property and equipment, net of accumulated depreciation of $1,486 and $2,920, respectively   410     735  
Equity method investments   4,351     3,959  
Deferred tax assets   38,661     61,396  
Other assets   2,308     2,298  
Total Assets   $ 82,618     $ 107,296  
LIABILITIES AND STOCKHOLDERS’ EQUITY        
Current liabilities:        
Accounts payable   $ 1,000     $ 1,920  
Accrued payroll and related liabilities   1,384     2,121  
Billings in excess of costs on uncompleted contracts   1,830     4,947  
Legal settlements and accruals       10,706  
Other current liabilities   2,664     4,017  
Total current liabilities   6,878     23,711  
Legal settlements and accruals, long-term       5,382  
Other long-term liabilities   2,285     2,038  
Total Liabilities   9,163     31,131  
Commitments and contingencies (Notes 3 and 4)        
Stockholders’ equity:        
Preferred stock: par value of $.001 per share, 50,000,000 shares authorized, none outstanding        
Common stock: par value of $.001 per share, 100,000,000 shares authorized, 22,465,821 and 22,322,022 shares issued and 20,752,055 and 22,024,675 shares outstanding at December 31, 2017 and 2016, respectively   22     22  
Treasury stock, at cost: 1,713,766 and zero shares as of December 31, 2017 and 2016, respectively   (16,397 )    
Additional paid-in capital   105,308     119,494  
Accumulated deficit   (15,478 )   (43,351 )
Total stockholders’ equity   73,455     76,165  
Total Liabilities and Stockholders’ Equity   $ 82,618     $ 107,296  

 

TABLE 2

Advanced Emissions Solutions, Inc. and Subsidiaries
Consolidated Statements of Operations
    Years Ended December 31,
 
(in thousands, except per share data) 2017   2016   2015
Revenues:
           
Equipment sales   $ 31,401     $ 46,949     $ 60,099  
Chemicals   4,246     3,025     888  
Consulting services and other   45     648     1,752  
Total revenues   35,692     50,622     62,739  
Operating expenses:            
Equipment sales cost of revenue, exclusive of depreciation and amortization   28,438     37,741     45,433  
Chemicals cost of revenue, exclusive of depreciation and amortization   3,434     1,700     601  
Consulting services and other cost of revenue, exclusive of depreciation and amortization   13     376     1,518  
Payroll and benefits   7,669     12,390     23,589  
Rent and occupancy   795     2,168     3,309  
Legal and professional fees   4,354     8,293     16,604  
General and administrative   3,857     3,721     6,104  
Research and development, net   157     (648 )   5,362  
Depreciation and amortization   789     979     2,019  
Total operating expenses   49,506     66,720     104,539  
Operating loss   (13,814 )   (16,098 )   (41,800 )
Other income (expense):            
Earnings from equity method investments   53,843     45,584     8,921  
Royalties, related party   9,672     6,125     10,642  
Interest income   54     268     24  
Interest expense   (3,024 )   (5,066 )   (8,402 )
Litigation settlement and royalty indemnity expense, net   3,269     3,464      
Other   2,025     2,463     494  
Total other income   65,839     52,838     11,679  
Income (loss) before income tax expense   52,025     36,740     (30,121 )
Income tax expense (benefit)   24,152     (60,938 )   20  
Net income (loss)   $ 27,873     $ 97,678     $ (30,141 )
Earnings (loss) per common share (Note 1):            
Basic   $ 1.30     $ 4.40     $ (1.37 )
Diluted   $ 1.29     $ 4.34     $ (1.37 )
Weighted-average number of common shares outstanding:            
Basic   21,367     21,931     21,773  
Diluted   21,413     22,234     21,773  
Cash dividends declared per common share outstanding:   $ 0.75     $     $  



TABLE 3

Advanced Emissions Solutions, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
    Years Ended December 31,
 
(in thousands) 2017   2016   2015
Cash flows from operating activities
           
Net income (loss)   $ 27,873     $ 97,678     $ (30,141 )
Adjustments to reconcile net income (loss) to net cash used in operating activities:            
Deferred tax benefit from release of valuation allowance   (474 )   (61,396 )    
Depreciation and amortization   789     979     2,019  
Debt prepayment penalty and amortization of debt issuance costs   109     1,380     987  
Impairment of property, equipment, inventory, intangibles and cost method investment   464     2,280     2,087  
Provision for accounts receivable and other receivables   385     13     633  
Interest costs added to principal balance of notes payable           923  
Share-based compensation expense, net   2,209     2,868     6,879  
Earnings from equity method investments   (53,843 )   (45,584 )   (8,921 )
Gain on sale of equity method investment       (2,078 )    
Gain on settlement of note payable, licensed technology, and sales-type lease       (1,910 )    
Other non-cash items, net   44     35     285  
Changes in operating assets and liabilities, net of effects of acquired businesses:            
Receivables   6,743     (301 )   8,361  
Related party receivables   (1,313 )   (16 )   (479 )
Prepaid expenses and other assets   (351 )   1,195     (107 )
Costs incurred on uncompleted contracts   27,048     29,623     6,492  
Deferred tax asset, net   23,208          
Other long-term assets   41     961     205  
Accounts payable   (920 )   (4,254 )   (1,340 )
Accrued payroll and related liabilities   (738 )   (2,887 )   (102 )
Other current liabilities   (1,586 )   (3,105 )   (812 )
Billings on uncompleted contracts   (30,140 )   (32,272 )   (15,186 )
Advance deposit, related party       (2,980 )   (3,544 )
Other long-term liabilities   154     (2,175 )   595  
Legal settlements and accruals   (16,088 )   (4,211 )   (3,722 )
Distributions from equity method investees, return on investment   4,638     7,900     5,019  
Net cash used in operating activities   $ (11,748 )   $ (18,257 )   $ (29,869 )
Cash flows from investing activities            
Distributions from equity method investees in excess of cumulative earnings   48,875     38,250     8,651  
Maturity of investment securities, restricted       336      
Acquisition of property and equipment   (485 )   (289 )   (507 )
Proceeds from sale of property and equipment   57     52     942  
Advance on note receivable           (500 )
Acquisition of business           (2,124 )
Purchase of and contributions to equity method investee   (61 )   (223 )   (2,128 )
Proceeds from sale of equity method investment       1,773      
Net cash provided by investing activities   48,386     39,899     4,334  
Cash flows from financing activities            
Borrowings on Line of Credit   808          
Repayments on Line of Credit   (808 )        
Short-term borrowings           13,539  
Repayments on short-term borrowings and notes payable, related party       (14,496 )   (3,234 )
Short-term borrowing loan costs and debt prepayment penalty   (236 )   (979 )    
Repurchase of shares to satisfy tax withholdings   (566 )   (196 )   (276 )
Dividends paid   (15,690 )        
Repurchase of common shares   (16,397 )        
Net cash (used in) provided by financing activities   (32,889 )   (15,671 )   10,029  
Increase (Decrease) in Cash and Cash Equivalents and Restricted Cash   3,749     5,971     (15,506 )
Cash and Cash Equivalents and Restricted Cash, beginning of year   26,944     20,973     36,479  
Cash and Cash Equivalents and Restricted Cash, end of year   $ 30,693     $ 26,944     $ 20,973  
Supplemental disclosure of cash flow information:            
Cash paid for interest   $ 3,644     $ 3,647     $ 6,274  
Cash paid for income taxes, net of refunds received   $ 1,672     $ 541     $ 29  
Supplemental disclosure of non-cash investing and financing activities:            
Settlement of RCM6 note payable   $     $ 13,234     $  
Non-cash reduction of equity method investment   $     $ 11,156     $  
Stock award reclassification (liability to equity)   $     $ 899     $  
Dividends payable   $ 139     $     $  

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Source: Advanced Emissions Solutions, Inc.

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