CHARAH SOLUTIONS, INC. The following discussion and analysis should be read in conjunction with the historical financial statements and the related notes included in Part II Item 8. Financial Statements and Supplementary Data. The following Management Discussion and Analysis of Financial Condition and Results of Operations included in this report provides an analysis of our financial condition and results of operations and reasons for material changes therein for the year endedDecember 31, 2019 as compared to the year endedDecember 31, 2018 ("2018"). Discussion regarding our financial condition and results of operation for 2018 as compared to the year endedDecember 31, 2017 is included in Part II, Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations of our Annual Report on Form 10-K for 2018 filed with theSEC onMarch 27, 2019 . This discussion contains "forwardlooking 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 forwardlooking 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, regulatory changes, and other uncertainties, as well as those factors discussed below and elsewhere herein. Please read Cautionary Note Regarding ForwardLooking Statements. Also, please read the risk factors and other cautionary statements described under "Item 1A. Risk Factors" included elsewhere herein. We assume no obligation to update any of these forwardlooking statements.Charah Solutions, Inc. Charah Solutions, Inc. (together with its subsidiaries, "Charah Solutions ," the "Company," "we," "us" or "our") was formed as aDelaware corporation inJanuary 2018 in anticipation of the IPO to be a holding company forCharah Management andAllied Power Holdings . We did not conduct any material business operations before the transactions described below under "-Initial Public Offering" other than certain activities related to the initial public offering (the "IPO"), which was completed onJune 18, 2018 . In connection with the closing of the IPO and pursuant to the terms and conditions of the master reorganization agreement datedJune 13, 2018 ,Charah Management LLC , aDelaware limited liability company ("Charah Management"), andAllied Power Holdings, LLC , aDelaware limited liability company ("Allied Power Holdings "), became our wholly owned subsidiaries. Through our ownership ofCharah Management andAllied Power Holdings , we own the outstanding equity interests inCharah, LLC , aDelaware limited liability company ("Charah") andAllied Power Management, LLC , aDelaware limited liability company ("Allied"), the subsidiaries through which we operate our businesses. Overview The historical financial data presented herein as ofDecember 31, 2019 and for periods after theJune 18, 2018 corporate reorganization is that ofCharah Solutions, Inc. and its subsidiaries on a consolidated basis includingCharah and Allied, and on a combined basis for periods prior to theJune 18, 2018 corporate reorganization. Allied was formed inMay 2017 and did not commence operations untilJuly 2017 . We are a leading provider of mission-critical environmental and maintenance services to the power generation industry. We offer a suite of coal ash management and recycling, environmental remediation, and utility plant outage-related 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 believe we are a partner-of-choice for the power generation industry due to our quality, safety, domain experience, and compliance record, all of which are key criteria for our customers. In 2019, we performed work at more than 50 coal-fired and nuclear power generation sites nationwide. We are an environmental remediation and maintenance company and we 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. Remediation and compliance services are associated with our customers' need for multi-year environmental improvement and sustainability initiatives, whether driven by regulatory requirements, by power generation customers initiatives, by our proactive engagement or by consumer expectations and standards. Byproduct sales support both our power generation customers' desire to recycle their recurring and legacy volumes of coal combustion residuals ("CCRs") commonly known as coal ash and our ultimate end customers' need for high-quality, cost-effective raw material substitutes. 29 -------------------------------------------------------------------------------- Maintenance and Technical Services. Our Maintenance and Technical Services segment includes fossil services and, from and afterMay 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 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). Initial Public Offering OnJune 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, and any remaining net proceeds were used to pay offering expenses or 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 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 operating income is a meaningful metric because it provides insight on profitability and operating performance based on the cost basis of our assets. We also compare operating income to our internal projections for a given period and to prior periods. Adjusted EBITDA and Adjusted EBITDA Margin We view Adjusted EBITDA and Adjusted EBITDA Margin, which are non-GAAP financial measures, as an important indicator of performance 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 define Adjusted EBITDA as net (loss) income 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) income, 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 Opportunities Our ability to grow revenue and earnings is dependent 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 30 -------------------------------------------------------------------------------- work with existing customers ahead of contract end dates to attempt 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 historical 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 the 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 are also impacted during winter months when the utilization of cement and cement products is generally lower. 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 longer periods. As a result, our revenue from these projects can fluctuate over time. Some of our revenue from projects is recognized over time using the cost-to-cost input method of accounting for GAAP purposes, based primarily on contract costs incurred to date compared to total estimated contract costs. This method is the most accurate measure of our contract performance because it depicts the company's performance in transferring control of goods or services promised to customers according to a reasonable measure of progress toward complete satisfaction of the performance obligation. The timing of revenue recorded for financial reporting purposes may differ from actual billings to customers, sometimes resulting in costs and billing 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 driven by market forces and governmental regulations creating 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 CCRs' (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. 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 believe 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. 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. More than 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. Revenue from construction contracts is recognized using the cost-to-cost input method. 31 -------------------------------------------------------------------------------- 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 the environmental service need of our customers in handling their waste byproducts. Over the last five years, our renewal rate for fossil services contracts 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 Public Company Costs 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 security holders, registrar and transfer agent fees, national stock exchange fees, audit fees, incremental director and officer liability insurance costs, and director and officer compensation Income TaxesCharah Solutions is a "C" corporation under the Internal Revenue Code of 1986, as amended, and, as a result, is subject toU.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 andAllied Power Holdings , respectively, became indirect subsidiaries ofCharah Solutions . Prior to the contribution,Charah and Allied passed through their taxable income to the owners of the partnerships forU.S. federal and other state and local income tax purposes and, thus, were not subject toU.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 toCharah and Allied prior to the contribution onJune 18, 2018 contains no provision forU.S. federal income taxes or income taxes in any state or locality other than franchise taxes. Year EndedDecember 31, 2019 Compared to Year EndedDecember 31, 2018 The table below sets forth our selected operating data for the years endedDecember 31, 2019 and 2018. 32 --------------------------------------------------------------------------------
Year Ended December 31, Change
Successor 2019 2018 $ %
(in thousands)
Revenue:
Environmental Solutions $ 180,396 $ 343,105 $ (162,709 ) (47.4 )%
Maintenance and Technical Services 374,472 397,357 (22,885 ) (5.8 )%
Total revenue 554,868 740,462 (185,594 ) (25.1 )%
Cost of sales 514,492 642,734 (128,242 ) (20.0 )%
Gross profit:
Environmental Solutions 11,486 69,464 (57,978 ) (83.5 )%
Maintenance and Technical Services 28,890 28,264 626 2.2 %
Total gross profit 40,376 97,728 (57,352 ) (58.7 )%
General and administrative expenses 60,870 76,752 (15,882 ) (20.7 )%
Operating (loss) income (20,494 ) 20,976 (41,470 ) (197.7 )%
Interest expense, net (16,835 ) (32,226 ) 15,391 (47.8 )%
Income from equity method investment 2,295 2,407 (112 ) (4.7 )%
Loss before taxes (35,034 ) (8,843 ) (26,191 ) 296.2 %
Income tax expense (benefit) 4,190 (2,427 ) 6,617 (272.6 )%
Net loss (39,224 ) (6,416 ) (32,808 ) 511.3 %
Less income attributable to
non-controlling interest 2,834 2,486 348 14.0 %
Net loss attributable to Charah
Solutions, Inc. $ (42,058 ) $ (8,902 ) $ (33,156 ) 372.5 %
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 discussed below) and unanticipated cost increases at three
remediation sites led to our disappointing financial performance for the year
ended December 31, 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 2019. The
volume of new awards in 2019 on a project revenue basis, 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 adversely impacted 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.
On May 29, 2019 , the ash remediation contract for our Brickhaven location was
deemed terminated, consistent with our previously communicated expectations. Per
the terms of the Brickhaven contract, the customer was obligated to pay us for
the recovery of project development costs, expected site closure costs, and
post-maintenance costs upon deemed termination. After negotiations with the
customer, the amount of the recovered costs was $80 million and the payment of
these costs was received during the year ended December 31, 2019 .
We continue to believe our market opportunities remain strong and are growing as
we have won approximately $583 million in new awards during the year ended
December 31, 2019 as compared to $106 million in 2018. While the projects were
awarded later than anticipated, as previously disclosed, our success rate in
winning awards for the year ended December 31, 2019 on a project revenue basis
was ahead of the year ended December 31, 2018 . Compared to last year, projects
awarded in 2018 were considerably smaller in size on the basis of revenue, which
negatively impacted our financial results 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 MP618TM 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 2019, 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.
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See "-Liquidity and Capital Resources-Our Debt Agreements-Existing Credit
Facility" below for more information about the Credit Facility and the
amendments thereto.
Revenue. Revenue decreased $185.6 million , or 25.1%, for the year ended
December 31, 2019 , to $554.9 million as compared to $740.5 million for the year
ended December 31, 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 $162.7 million , or 47.4%, for the year ended December 31, 2019 , to
$180.4 million as compared to $343.1 million for the year ended December 31,
2018 . The decrease in revenue was primarily attributable to remediation and
compliance project completions 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 an overall net increase in
revenue from our byproduct sales.
Maintenance and Technical Services Revenue. Maintenance and Technical Services
segment revenue decreased $22.9 million , or 5.8%, for the year ended
December 31, 2019 , to $374.5 million as compared to $397.4 million for the year
ended December 31, 2018 . The decrease in revenue was primarily attributable to
the reduced scope of nuclear outages services and fewer outages in the year
ended December 31, 2019 , partially offset by an overall net increase in revenue
from our fossil services offerings.
Gross Profit. Gross profit decreased $57.4 million , or 58.7%, for the year ended
December 31, 2019 to $40.4 million as compared to $97.7 million for the year
ended December 31, 2018 , driven primarily by a decrease in revenue. As a
percentage of revenue, gross profit was 7.3% and 13.2% for the year ended
December 31, 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 $58.0 million , or 83.5%, for the year ended
December 31, 2019 , to $11.5 million as compared to $69.5 million for the year
ended December 31, 2018 . The decrease in gross profit was primarily driven by
remediation and compliance project completions, the $10.0 million revenue
reversal associated with the deemed termination of the Brickhaven contract,
adverse weather-related impacts and site-specific issues at three remediation
sites which resulted in higher than expected costs.
Maintenance and Technical Services Gross Profit. Gross profit for our
Maintenance and Technical Services segment increased $0.6 million , or 2.2%, for
the year ended December 31, 2019 , to $28.9 million as compared to $28.3 million
for the year ended December 31, 2018 . The increase in gross profit overall was
primarily attributable to a net increase in gross profit from our fossil
services offerings.
General and Administrative Expenses. General and administrative expenses
decreased $15.9 million , or 20.7%, for the year ended December 31, 2019 , to
$60.9 million as compared to $76.8 million for the year ended December 31, 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 year
ended December 31, 2018 , related to legal proceedings during that period,
non-recurring start-up costs and equity-based compensation, partially offset by
increased expenses due to the acquisition of SCB Materials International, Inc.
and affiliated entities ("SCB") in March 2018 , increased transaction-related
expenses during the year ended December 31, 2019 associated with an amendment to
the Credit Facility and a decrease in amortization expense during the year ended
December 31, 2019 related to our purchase option liability.
Interest Expense, Net. Interest expense, net decreased $15.4 million , or 47.8%,
for the year ended December 31, 2019 , to $16.8 million as compared to $32.2
million for the year ended December 31, 2018 . The decrease was primarily
attributable to a favorable comparison as $12.5 million of costs were incurred
in conjunction with the refinancing of our debt during the year ended
December 31, 2018 , consisting of a $10.4 million non-cash write-off of debt
issuance costs and a $2.1 million prepayment penalty, and a reduction in the
debt balances using cash received from the Brickhaven deemed termination payment
received during the year ended December 31, 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 $0.1 million , or 4.7%, for the year ended December 31, 2019 , to $2.3
million as compared to $2.4 million for the year ended December 31, 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.
Income tax expense (benefit) Income tax expense increased by $6.6 million for
the year ended December 31, 2019 , to income tax expense of $4.2 million as
compared to an income tax benefit of $2.4 million during the year ended
December 31, 2018 . Based on the available evidence as of December 31, 2019 , we
were not able to conclude it was more likely than not certain deferred tax
assets will be realized. Therefore, a valuation allowance of $12.9 million was
recorded against our deferred tax assets. The valuation allowance was partially
offset by an income tax benefit associated with the increase in our loss before
taxes.
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Net Loss. Net loss increased $32.8 million for the year ended December 31, 2019 ,
to a loss of $39.2 million as compared to $6.4 million for the year ended
December 31, 2018 . The increase was primarily attributable to lower gross profit
resulting from lower revenue, and an increase in income tax expense, partially
offset by the decrease in general and administrative expenses and interest
expense, net as discussed above.
Consolidated Balance Sheet
The following table is a summary of our overall financial position:
As of December 31, Change
2019 2018 $
(in thousands)
Total assets $ 355,756 $ 458,901 $ (103,145 )
Total liabilities 302,483 365,511 (63,028 )Total stockholders' equity 53,273 93,390 (40,117 )
Assets
Total assets decreased$103.1 million driven primarily by a decrease in contract assets from the$80.0 million Brickhaven deemed termination payment received during 2019, a$11.0 million decrease in inventory from improved inventory management, a$8.4 million decrease in intangible assets, net due to amortization, and a$3.6 million decrease in property and equipment, net as depreciation expense and disposal of assets exceeded new additions. Liabilities Total liabilities decreased$63.0 million driven by a$49.5 million net decrease in notes payable and amounts owed under the Revolving Loan (as defined below) as proceeds from the Brickhaven deemed termination payment were used to pay down our debt balances, a$10.9 million decrease in our asset retirement obligation associated with our maintenance and monitoring requirement payments and a$2.9 million decrease in our purchase option liability from amortization. Stockholders' Equity Total stockholders' equity decreased$40.1 million driven primarily by the$39.2 million net loss, a$0.4 million decrease as a result of the adoption of Accounting Standards Codification ("ASC") 606, Revenue from Contracts with Customers, a decrease of$2.9 million related to distributions to our non-controlling interest, partially offset by an increase of$2.5 million in share-based compensation. 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. As ofDecember 31, 2019 , we had total liquidity of approximately$28.9 million , comprised of$4.9 million of cash on hand,$19.0 million availability under the Revolving Loan and$5.0 million of delayed draw availability under the Term Loan. Cash Flows Year EndedDecember 31, 2019 Compared to Year EndedDecember 31, 2018 Year Ended December 31, Change Successor 2019 2018 $ (in thousands) Cash flows provided by (used in) operating activities$ 68,653 $ (13,633 ) $ 82,286 Cash flows used in investing activities (15,759 ) (40,368 )$ 24,609 Cash flows (used in) provided by financing activities (53,666 ) 28,637$ (82,303 ) 35
-------------------------------------------------------------------------------- Operating Activities Net cash provided by (used in) operating activities increased$82.3 million for the year endedDecember 31, 2019 , to$68.7 million of net cash provided by operating activities as compared to$13.6 million of net cash used in operating activities for the year endedDecember 31, 2018 . The change in cash flows provided by (used in) operating activities was primarily attributable to the$80.0 million Brickhaven deemed termination payment received during the year endedDecember 31, 2019 , a decrease of$10.8 million in cash paid for interest due to the debt refinancing during the year endedDecember 31, 2018 , a decrease in cash paid for income taxes during the year endedDecember 31, 2019 of$5 million and improvements in working capital items from the year-over-year change in inventory of$16.8 million . These decreases were partially offset by an increase in net loss of$33.2 million . Investing Activities Net cash used in investing activities decreased$24.6 million for the year endedDecember 31, 2019 , to$15.8 million as compared to$40.4 million for the year endedDecember 31, 2018 . The change in cash flows used in investing activities was primarily attributable to$20.0 million used for business acquisitions during the year endedDecember 31, 2018 , net of cash received, and a decrease in capital expenditures, net of proceeds, of$4.6 million . Financing Activities Net cash (used in) provided by financing activities increased$82.3 million for the year endedDecember 31, 2019 , to$54 million of net cash used in financing activities as compared to$28.6 million of net cash provided by financing activities for the year endedDecember 31, 2018 . The change in cash flows (used in) provided by financing activities was primarily attributable to the$59.2 million in proceeds received during the year endedDecember 31, 2018 from the issuance of common stock resulting from our IPO. In addition, there was a net increase of$30.5 million in debt related payments during the year endedDecember 31, 2019 . These decreases were partially offset by a$7.5 million reduction in debt and IPO related costs as$1.4 million was paid during the year endedDecember 31, 2019 as compared to$8.9 million paid during the year endedDecember 31, 2018 . Working Capital Our working capital, which we define as total current assets less total current liabilities, totaled a working capital deficit of$16.1 million and working capital of$74.1 million as ofDecember 31, 2019 and 2018, respectively. This decrease in net working capital for the year endedDecember 31, 2019 was primarily due to decreases in contract assets from the Brickhaven deemed termination, decreases in inventory resulting from the timing of activities between periods and improved inventory management and increases in notes payable, current maturities, related to the Third Amendment (as discussed below). Our Debt Agreements Former Credit Agreement OnOctober 25, 2017 , we entered into a credit agreement (the "2017 Credit Agreement") by and among us, the lenders party thereto from time to time andRegions 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 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 ofOctober 25, 2022 ; however, all amounts outstanding were repaid inSeptember 2018 as a result of the refinancing discussed below. Former CS Term Loan OnOctober 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 36 -------------------------------------------------------------------------------- amount so long as such amount at such time could be incurred without causing the pro forma consolidated secured leverage ratio (as defined in the credit agreement governing the 2017 CS Term Loan) 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 customary 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 beginningMarch 31, 2018 , decreasing to 4.50 to 1.00 as ofMarch 31, 2019 , and further decreasing to 4.00 to 1.00 as ofMarch 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 inJune 2020 . The 2017 CS Term Loan had a scheduled maturity date ofOctober 25, 2024 ; however, all amounts outstanding were repaid inSeptember 2018 as a result of the refinancing discussed below. Existing Credit Facility OnSeptember 21, 2018 , we entered into a credit agreement (the "Credit Facility") by and among us, the lenders party thereto from time to time, andBank of America, N.A ., 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
• A commitment to loan up to a further
March 2020 (the "Delayed Draw Commitment" and the term loans
funded
under such Delayed Draw Commitment, the "Delayed Draw TermLoan,"
together with the Closing Date Term Loan, the "Term Loan").
After the Third Amendment all amounts associated with the Revolving Loan and the
Term Loan under the Credit Facility will mature in July 2022 , as discussed more
fully below. 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 (as defined in the Credit
Facility). Customary fees are payable in respect of the Credit Facility and
include (i) commitment fees for the unused portions of the Credit Facility and
(ii) fees on outstanding letters of credit. Amounts borrowed under the Credit
Facility are secured by substantially all of the assets of the Company.
The Credit Facility contains various customary 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 our subsidiaries' 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), which have
been modified as described below.
The Credit Facility also contains certain affirmative covenants, including
reporting requirements, such as the 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 as they come due, 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 $50.0 million , reduced
by outstanding letters of credit. As of December 31, 2019 , $19.0 million was
outstanding on the Revolving Loan and $12.0 million in letters of credit were
outstanding.
But for Amendment No. 2 to Credit Agreement and Waiver (the "Second 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 Second Amendment, pursuant to
which, among other things, the required lenders agreed to waive such
non-compliance.
In addition, pursuant to the terms of the Second Amendment, the Credit Facility
was amended to revise the required financial covenant ratios, which have been
modified as described below. As consideration for these accommodations, we
agreed that amounts borrowed pursuant to the Delayed Draw Commitment would not
exceed $15.0 million at any one time outstanding
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(without reducing the overall Delayed Draw Commitment amount). Further, the
margin of interest charged on all outstanding loans was increased to 4.00% for
loans based on LIBOR and 3.00% for loans based on the alternative base rate. The
Second Amendment revised the amount of (i) the commitment fees to 0.35% at all
times for the unused portions of the Credit Facility and (ii) fees on
outstanding letters of credit to 3.35% at all times. The Second 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 before September 13,
2019 , using proceeds of the Brickhaven deemed termination payment.
The Second Amendment also included 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 Second Amendment, we will not be permitted to make
any distributions or dividends to our stockholders without the consent of the
required lenders.
After the end of our fiscal year, ended December 31, 2019 , in March 2020 , the
Company entered into Amendment No. 3 to Credit Agreement (the "Third
Amendment").
Pursuant to the terms of the Third Amendment, the Credit Facility was amended to
waive the mandatory $40.0 million prepayment due on or before March 31, 2020 ,
and to revise the required financial covenant ratios such that, after giving
effect to the Third Amendment, we are not required to comply with any financial
covenants through December 30, 2020 . After December 30, 2020 , we will be
required to comply with a maximum consolidated net leverage ratio of 6.50 to
1.00 from December 31, 2020 through June 29, 2021 , decreasing to 6.00 to 1.00
from June 30, 2021 through December 30, 2021 , and to 3.50 to 1.00 as of December
31, 2021 and thereafter. After giving effect to the Third Amendment, we will
also be required to comply with a minimum fixed charge coverage ratio of 1.00 to
1.00 as of December 31, 2020 , increasing to 1.20 to 1.00 as of March 31, 2021
and 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 (as defined in the Credit
Facility) 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.
The Third Amendment increased the maximum amount available to be borrowed
pursuant to the Delayed Draw Commitment from $15.0 million to $25.0 million ,
subject to certain quarterly amortization payments. The Third Amendment also
included revisions to the restrictive covenants, including increasing the amount
of indebtedness that the Company may incur in respect of certain capitalized
leases from $50.0 million to $75.0 million .
Under the Third Amendment, the Company has agreed to make monthly amortization
payments in respect of term loans beginning in April 2020 , and to move the
maturity date for all loans under the Credit Agreement to July 31, 2022 (the
"Maturity Date"). In addition, if at any time after August 13, 2019 , the
outstanding principal amount of the Delayed Draw Term Loans exceeds $10.0
million , we will incur additional interest at a rate equal to 10.0% per annum on
all daily average amounts exceeding $10.0 million payable at March 31, 2020 and
the Maturity Date. Further, the Third Amendment requires mandatory prepayments
of revolving loans with any cash held by the Company in excess of $10.0 million ,
which excludes the amount of proceeds received in respect of the Preferred Stock
Offering (as defined below) to the extent such funds are used for liquidity and
general corporate purposes. The Company has also agreed to an increase of four
percent (4%) to the interest rate applicable to the Closing Date Term Loan that
will be compounded monthly and paid in kind by adding such portion to the
outstanding principal amount.
As a condition to entering into the Second Amendment, we are required to pay the
Administrative Agent an amendment fee (the "Second Amendment Fee") in an amount
equal to 1.50% of the total credit exposure under the Credit Agreement,
immediately prior to the effectiveness of the Second Amendment. Of the Second
Amendment Fee, 0.50% was due and paid on October 15, 2019 , and 1.00% of such
Second Amendment Fee will become due and payable on August 16, 2020 if the
facility has not been terminated on or prior to August 15, 2020 . We are also
required to pay the Administrative Agent an amendment fee associated with the
Third Amendment (the "Third Amendment Fee") in an amount equal to 0.20% of the
total credit exposure under the Credit Agreement, immediately prior to the
effectiveness of the Third Amendment, with such Third Amendment Fee being due
and payable on June 30, 2020 . Finally, we will also pay an additional fee with
respect to the Third Amendment in the amount of $2.0 million with such fee being
due and payable on the Maturity Date; provided that if the facility is
terminated by December 31, 2020 , 50% of this fee shall be waived.
As a condition to the Third Amendment, the Company entered into an agreement
with an investment fund affiliated with Bernhard Capital Partners Management, LP
("BCP " or the "Holder") to sell 26,000 shares of Series A Preferred Stock, par
value $0.01 (the "Preferred Stock") for approximately $25.2 million in a private
placement (the "Preferred Stock Offering"). The Preferred Stock will have an
initial liquidation preference of $1,000 per share and will pay a dividend at
the rate of 10% per annum in cash, or 13% if the Company elects to pay dividends
in kind by adding such amount to the liquidation preference. The Company's
intention is to pay dividends in kind for the foreseeable future. Proceeds from
the Preferred Stock Offering will be used for liquidity and general corporate
purposes.
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Following the three-month anniversary of the date of issuance, the Preferred
Stock may be converted at the option of the holders into shares of the Company's
common stock at a conversion price of $2.77 per share (the "Conversion Price"),
which represents a 30% premium to the 20-day volume-weighted average price ended
March 4, 2020 . Following the third anniversary of the date of issuance, the
Company may, subject to certain requirements, give notice to the holders of the
Preferred Stock of the Company's intent to mandatorily convert the Preferred
Stock, and the holders of the Preferred Stock will have the option to either
agree to such conversion or force the Company to redeem the Preferred Stock for
cash. Following the seven-year anniversary of the date of issuance, the holders
shall have the right, subject to applicable law, to require the Company at any
time to redeem the Preferred Stock, in whole or in part, from any source of
funds legally available for such purpose.
In connection with certain change of control transactions, the holders of the
Preferred Stock will be entitled to cause the Company to repurchase the
Preferred Stock for cash in an amount equal to the greater of (i) the
liquidation preference plus accrued and unpaid dividends (plus, a make-whole
premium equal to the net present value of dividend payments through
the third anniversary of the issue date, for any transaction occurring prior to
such date, subject to certain limitations) and (ii) the amount each holder would
be entitled to receive if the Preferred Stock were converted prior to such
transaction. The Company will have the right to redeem the Preferred Stock
starting on the third anniversary of the issue date at the greater of (i) the
closing sale price multiplied by the number of shares of common stock issuable
upon conversion and (ii) certain premiums to the liquidation preference that
will decrease each year following the third anniversary of the issuance date.
From April 5, 2020 , until conversion, the holders of the Preferred Stock will
vote together with Company's common stock on an as-converted basis and will also
have rights to vote on certain matters impacting the Preferred Stock. After
April 5, 2020 , the holders of the Preferred Stock will have the right to either
elect one member to the Company's board of directors or appoint one non-voting
board observer.
Equipment Financing Facilities
We have entered into various equipment financing arrangements to finance the
acquisition of certain equipment (the "Equipment Financing Facilities"). As of
December 31, 2019 , we had $36.3 million of equipment notes outstanding. Each of
the Equipment Financing Facilities include non-financial covenants, and, as of
December 31, 2019 , we were in compliance with all such covenants.
Contractual and Commercial Commitments
The following table summarizes our contractual obligations and commercial
commitments as of December 31, 2019 and reflects the waiver of the mandatory
$40.0 million prepayment due on or before March 31, 2020 and the new payment
terms noted in the Third Amendment:
Total 2020 2021 2022 2023 2024 Thereafter
(in thousands)
Term Loan $ 152,187 $ 18,647 $ 15,448 $ 118,092 $ - $ - $ -
Revolving Loan 19,000 - - 19,000 - - -
Equipment Financing
Facilities 36,319 15,720 6,108 6,424
5,217 2,472 378
Commercial insurance
financing agreement 506 506 - - - - -
Interest on OutstandingLoans 22,253 9,480 8,066 4,313 301 89 4 Operating Lease Obligations(1) 21,008 7,396 4,734 3,965 3,426 1,389 98 Credit Facility Amendment fees(2) 1,439 439 - 1,000 - - - Minimum Royalty and purchase obligations 54,634 9,948 11,721 11,821 11,196 9,218 730 Total(3)$ 307,346 $ 62,136 $ 46,077 $ 164,615 $ 20,140 $ 13,168 $ 1,210 (1) We lease equipment and office facilities under non-cancellable operating leases.
(2) Represents minimum fees required that are not contingent upon potential
changes to the Maturity Date.
(3) Contingent payments for acquisitions and the asset retirement
obligation are not included in the table above because the timing of
such payments is uncertain. There are no uncertain tax positions.
Non-GAAP Financial Measures
Adjusted EBITDA
Adjusted EBITDA and Adjusted EBITDA margin are not financial measures determined
in accordance with GAAP.
We define Adjusted EBITDA as net (loss) income 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
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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) income
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) income 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)
income, our most directly comparable financial measure calculated and presented
in accordance with GAAP, along with our Adjusted EBITDA margin.
The successor columns below represent the consolidated financial information of
Charah Solutions for the years ended December 31, 2019 and 2018 and the combined
financial information of Charah and Allied for the period from January 13, 2017
through December 31, 2017 , and the predecessor column below represents the
financial information of Charah for the period from January 1, 2017 , through
January 12, 2017 , each as reflected in our audited financial statements included
elsewhere herein.
Successor Predecessor
Period from
January 13, Period from
2017 through January 1, 2017
Year Ended Year Ended December 31, through January
December 31, 2019 December 31, 2018 2017 12, 2017
(in thousands)
Net (loss) income attributable to Charah
Solutions, Inc. $ (42,058 ) $ (8,902 ) $ 18,316 $ (5,528 )
Interest expense, net 16,835 32,226 14,146 4,181
Income tax expense (benefit) 4,190 (2,427 ) - -
Depreciation and amortization 23,437 42,308 25,719 763
Elimination of certain non-recurring
legal costs and expenses(1) (2,231 ) 25,428 8,650 -
Elimination of certain non-recurring
start-up costs(2) - 1,480 6,167 -
Equity-based compensation 2,513 4,127 2,429 -
Brickhaven contract deemed termination
revenue reversal 10,000 - - -
Transaction related expenses and other
items(3) 5,454 4,532 1,003 162
Adjusted EBITDA $ 18,140 $ 98,772 $ 76,430 $ (422 )
Adjusted EBITDA margin(4) 3.3% 13.3% 18.1% (4.6)%
(1) 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 start-up 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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Critical Accounting Policies and Estimates
Our financial statements are prepared in accordance with GAAP. In connection
with preparing our financial statements, we are required to make assumptions and
estimates about future events, and apply judgments that affect the reported
amounts of assets, liabilities, revenue, expense, and the related disclosures.
We base our assumptions, estimates, and judgments on historical experience,
current trends and other factors that management believes to be relevant at the
time we prepare our consolidated and combined financial statements. On a regular
basis, management reviews the accounting policies, assumptions, estimates, and
judgments to ensure that our consolidated combined financial statements are
presented fairly and in accordance with GAAP. However, because future events and
their effects cannot be determined with certainty, actual results could differ
materially from our assumptions and estimates.
Our significant accounting policies are described in Note 2 to our consolidated
and combined financial statements included herein. Our critical accounting
policies are described below to provide a better understanding of our estimates
and assumptions about future events that affect the amounts reported in the
consolidated and combined financial statements and accompanying notes.
Significant accounting estimates are important to the representation of our
financial position and results of operations and involve our most difficult,
subjective or complex judgments. We base our estimates on historical experience
and on various other assumptions we believe to be reasonable according to the
current facts and circumstances through the date of the issuance of our
financial statements.
Revenue
We adopted Accounting Standards Codification Topic 606: Revenue from Contracts
with Customers ("ASC 606") on January 1, 2019 . Accordingly, we revised our
accounting policy on revenue recognition from the policy provided in the notes
to our consolidated and combined financial statements included in our Annual
Report on Form 10-K for the year ended December 31, 2018 . Our revised accounting
policy on revenue recognition is provided in Note 2 to our consolidated and
combined financial statements for the year ended December 31, 2019 contained
herein.
To determine revenue recognition for contracts, we evaluate whether two or more
contracts should be combined and accounted for as one single contract and
whether the combined or single contract should be accounted for as more than one
performance obligation. This evaluation requires significant judgment and the
decision to combine a group of contracts or separate a combined or single
contract into multiple performance obligations could change the amount of
revenue and profit recorded in a given period. Contracts are considered to have
a single performance obligation if the promise to transfer the individual goods
or services is not separately identifiable from other promises in the contracts
primarily because we provide a service that involves multiple inter-related and
integrated tasks to achieve the completion of a specific, single project. For
contracts with multiple performance obligations, we allocate the transaction
price to each performance obligation using our best estimate of the stand-alone
selling price of each distinct good or service in the contract.
For sales and service contracts where we have the right to consideration from
the customer in an amount that corresponds directly with the value received by
the customer based on our performance to date, revenue is recognized at a point
in time when services are performed and contractually billable. Certain service
contracts contain provisions dictating fluctuating rates per unit for the
certain services in which the rates are not directly related to changes in the
Company's effort to perform under the contract. We recognize revenue based on
the stand-alone selling price per unit for such contracts, calculated as the
average rate per unit over the term of those contractual rates. This creates a
contract asset or liability for the difference between the revenue recognized
and the amount billed to the customer.
Under the typical payment terms of our services contracts, amounts are billed as
work progresses in accordance with agreed-upon contractual terms, at periodic
intervals (e.g., weekly, biweekly or monthly).
We recognize revenue over time, as performance obligations are satisfied, for
substantially all of our construction contracts due to the continuous transfer
of control to the customer. For most of our construction contracts, the customer
contracts with us to provide a service that involves multiple inter-related and
integrated tasks to achieve the completion of a specific, single project and are
therefore accounted for as a single performance obligation. We recognize revenue
using the cost-to-cost input method, based primarily on contract costs incurred
to date compared to total estimated contract costs. This method is the most
accurate measure of our contract performance because it depicts the company's
performance in transferring control of goods or services promised to customers
according to a reasonable measure of progress toward complete satisfaction of
the performance obligation.
Contract costs include all direct material, labor and subcontractor costs and
indirect costs related to contract performance. For costs incurred that do not
relate directly to transferring a service to the customer, they are excluded
from the input method used to recognize revenue. Project mobilization costs are
generally charged to the project as incurred when they are an integrated part of
the performance obligation being transferred to the client. Pre-contract costs
are expensed as incurred unless they are expected to be recovered from the
client.
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It is common for our contracts to contain contract provisions that give rise to
variable consideration such as unpriced change orders or volume discounts that
may either increase or decrease the transaction price. We estimate the amount of
variable consideration at the expected value or most likely amount, depending on
which is determined to be more predictive of the amount to which the Company
will be entitled. Variable consideration is included in the transaction price
when it is probable that a significant reversal of cumulative revenue recognized
will not occur or when the uncertainty associated with the variable
consideration is resolved. Our estimates of variable consideration and
determination of whether to include such amounts in the transaction price are
based largely on our assessment of legal enforceability, anticipated
performance, industry business practices, and any other information (historical,
current or forecasted) that is reasonably available to us. Variable
consideration associated with unapproved change orders is included in the
transaction price only to the extent of costs incurred.
We provide limited warranties to customers for work performed under our
contracts. Such warranties are not sold separately, provide assurance that the
services comply with the agreed-upon specifications and legal requirements and
do not provide customers with a service in addition to assurance of compliance
with agreed-upon specifications. Accordingly, these types of warranties are not
considered to be separate performance obligations. Historically, warranty claims
have not resulted in material costs incurred by the Company.
Due to the nature of the work required to be performed on many of our
performance obligations, the estimation of total revenue and cost at completion
is complex, subject to many variables and requires significant judgment. As a
significant change in one or more of these estimates could affect the
profitability of our contracts, we routinely review and update our
contract-related estimates through a disciplined project review process in which
management reviews the progress and execution of our performance obligations and
the estimated costs at completion. As part of this process, management reviews
information including, but not limited to, outstanding contract matters,
progress towards completion, program schedule and the associated changes in
estimates of revenue and costs. Management must make assumptions and estimates
regarding the availability and productivity of labor, the complexity of the work
to be performed, the availability and cost of materials, the performance of
subcontractors, and the availability and timing of funding from the customer,
along with other risks inherent in performing services under all contracts where
we recognize revenue over-time using the cost-to-cost method.
We recognize changes in contract estimates on a cumulative catch-up basis in the
period in which the changes are identified. Such changes in contract estimates
can result in the recognition of revenue in a current period for performance
obligations which were satisfied or partially satisfied in prior periods.
Changes in contract estimates may also result in the reversal of previously
recognized revenue if the current estimate differs from the previous estimate.
If at any time the estimate of contract profitability indicates an anticipated
loss on the contract, we recognize the total loss in the period it is
identified.
Contracts are often modified to account for changes in contract specifications
and requirements. Most of our contract modifications are for goods or services
that are not distinct from existing contracts due to the significant integration
provided in the context of the contract and are accounted for as if they were
part of the original contract. The effect of a contract modification on the
transaction price and our measure of progress for the performance obligation to
which it relates, is recognized as an adjustment to revenue (either as an
increase in or a reduction of revenue) on a cumulative catch-up basis. We
account for contract modifications when the modification results in the promise
to deliver additional goods or services that are distinct and the increase in
the price of the contract is for the same amount as the stand-alone selling
price of the additional goods or services included in the modification.
We evaluate our contracts whether we are acting as the principal or as the agent
when providing services, which we consider in determining if revenue should be
reported on a gross or net basis. We determine the Company to be a principal if
we control the specified service before that service is transferred to a
customer.
Billing practices are governed by the contract terms of each project based upon
costs incurred, the achievement of milestones or predetermined schedules.
Billings do not necessarily correlate with revenue recognized over time using
the cost-to-cost input method. Contract assets include unbilled amounts
typically resulting from revenue under long-term contracts when the revenue
recognized exceeds the amount billed to the customer. Contract liabilities
consist of advance payments and billings in excess of revenue recognized as well
as deferred revenue.
Contract assets also include retainage, which represents amounts withheld by our
clients from billings pursuant to provisions in the contracts and may not be
paid to us until the completion of specific tasks or the completion of the
project and, in some instances, for even longer periods.
Our contract assets and liabilities are reported in a gross position on a
contract-by-contract basis at the end of each reporting period. We include in
current assets and liabilities contract assets and liabilities, which may extend
beyond one year.
Goodwill
Goodwill represents the cost of an acquisition purchase price over the fair
value of acquired net assets, and such amounts are reported separately as
goodwill on our consolidated and combined balance sheets. Our total goodwill
resulted from the
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application of "push-down" accounting associated with BCP's January 2017
acquisition of a controlling equity position in Charah Management and the
acquisition of certain assets and liabilities of SCB.
Goodwill is not amortized, but instead is tested for impairment at least
annually, as of October 1st of each year, or more often if events or
circumstances indicate that goodwill might be impaired. Goodwill is tested at
the reporting unit level. We may elect to perform a qualitative assessment for
our reporting units to determine whether it is more likely than not that the
fair value of the reporting unit is greater than its carrying value. If a
qualitative assessment is not performed, or if as a result of a qualitative
assessment it is not more likely than not that the fair value of a reporting
unit exceeds its carrying value, then the reporting unit's fair value is
compared to its carrying value. Fair value is typically estimated using an
income approach based on discounted cash flows. However, when appropriate, we
may also use a market approach. The income approach is based on the long-term
projected future cash flows of the reporting units. We discount the estimated
cash flows to present value using a weighted average cost of capital that
considers factors such as market assumptions, the timing of the cash flows, and
the risks inherent in those cash flows. We believe that this approach is
appropriate because it provides a fair value estimate based upon the reporting
units' expected long-term performance considering the economic and market
conditions that generally affect our business. The market approach estimates
fair value by measuring the aggregate market value of publicly traded companies
with similar characteristics to our business as a multiple of their reported
earnings. We then apply that multiple to the reporting units' earnings to
estimate their fair values. We believe that this approach may also be
appropriate in certain circumstances because it provides a fair value estimate
using valuation inputs from entities with operations and economic
characteristics comparable to our reporting units. Fair value is computed using
several factors, including projected future operating results, economic
projections, anticipated future cash flows, comparable marketplace data, and the
cost of capital. There are inherent uncertainties related to these factors and
to our judgment in applying them in our analysis. However, we believe our
methodology for estimating the fair value of our reporting units is reasonable.
If the carrying value of a reporting unit exceeds its fair value, goodwill is
written down to its implied fair value.
The Company performed quantitative assessments of its Environmental Solutions
and Maintenance and Technical Services reporting units as of October 1, 2019 .
The Environmental Solutions and Maintenance and Technical Services reporting
units' fair values, as calculated, were approximately 6.8% and 143.3%,
respectively, greater than their book values as of October 1, 2019 .
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 50-basis point increase to the discount rate assumption and
(ii) a 50-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
+50 bps Discount Rate -50 bps Growth Rate
Environmental Solutions reporting unit 7.1 % 7.3 %
Deferred Taxes, Valuation Allowance
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As discussed in Note 18 to our consolidated and combined financial statements,
deferred tax assets and liabilities are recognized for the expected future tax
consequences of events that have been recognized in our consolidated and
combined financial statements or tax returns. We record a valuation allowance to
reduce certain deferred tax assets to amounts that are more-likely-than-not to
be realized. We evaluate the realizability of our deferred tax assets by
assessing the valuation allowance and by adjusting the amount of such allowance,
if necessary. The factors used to assess the likelihood of realization include
our forecast of future taxable income exclusive of reversing temporary
differences and carryforwards, future reversals of existing taxable temporary
differences and available tax planning strategies that could be implemented to
realize the net deferred tax assets.
Based on the available evidence as of December 31, 2019 , we were not able to
conclude it is more likely than not certain deferred tax assets will be
realized. Therefore, a valuation allowance of $12.9 million was recorded against
our deferred tax assets. We will continue to evaluate the need for a valuation
allowance on our deferred tax assets in future periods.
Recent Accounting Pronouncements
Please see Note 2, "Summary of Significant Accounting Policies-Recently Adopted
Accounting Pronouncements" and "Summary of Significant Accounting
Policies-Recently Issued Accounting Pronouncements" to our historical
consolidated and combined financial statements as of and for the years ended
December 31, 2019 and 2018, included elsewhere herein, for a discussion of
recent accounting pronouncements.
Under 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 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(b) of the JOBS Act
until we are no longer an emerging growth company.
Item 7A. Quantitative and Qualitative Disclosure About Market Risks
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 December 31, 2019 , we had $152.2 million of debt outstanding under the
Term Loan and $19.0 million of outstanding borrowings under the Revolving Loan,
with an interest rate of 5.8%. A 1.0% increase or decrease in the interest rate
would increase or decrease interest expense by approximately $1.7 million per
year assuming a consistent debt balance. We currently have an interest rate cap
in place with respect to outstanding indebtedness under our Term Loan that
provides a ceiling on three-month LIBOR at 2.5% for a notional amount of $150.0
million . A fair value liability of $1.1 million was recorded with respect to our
interest rate cap in the consolidated balance sheet within other liabilities as
of December 31, 2019 and a fair value asset of $0.9 million was recorded in the
consolidated balance sheet within other assets as of December 31, 2018 .
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.
Off-Balance Sheet Arrangements
We currently have no material off-balance sheet arrangements except for
operating leases as referenced in "Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations-Liquidity and Capital
Resources."
Item 8. Financial Statements and Supplementary Data
Our consolidated and combined financial statements and the related notes begin
on page F-1 herein.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
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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) under the
Exchange Act as of the end of the period covered by this Annual Report. Based on
such evaluation, our principal executive officer and principal financial officer
have concluded that as of such date, our disclosure controls and procedures were
effective.
Management's Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal
control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of
the Exchange Act). The Company's internal control over financial reporting is a
process designed under the supervision of its Chief Executive Officer (Principal
Executive Officer) and Chief Financial Officer and Treasurer (Principal
Financial Officer) and effected by the Company's Board of Directors, management
and other personnel, to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of its financial statements for
external reporting purposes in accordance with GAAP.
The Company's internal control over financial reporting includes policies and
procedures that pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect transactions and dispositions of the
Company's assets; provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with GAAP,
and that receipts and expenditures of the Company are being made only in
accordance with authorizations of management and the directors; and provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of the Company's assets that could have a
material effect on its financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. In addition, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
Management conducted an evaluation of the effectiveness of the Company's
internal control over financial reporting as of December 31, 2019 based on the
framework established in Internal Control - Integrated Framework (2013) issued
by the Committee of Sponsoring Organizations of the Treadway Commission . Based
on this assessment, management concluded that the Company's internal control
over financial reporting as of December 31, 2019 was effective.
This annual report does not include an attestation report of the Company's
registered public accounting firm due to an exemption for emerging growth
companies under the JOBS Act.
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(e) of the Exchange Act that occurred during the quarter ended December
31, 2019 that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
Item 9B. Other Information
None.
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