COVIA HOLDINGS CORPORATION Cautionary Statement Concerning Forward-Looking Statements for Purposes of the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995
The Private Securities Litigation Reform Act of 1995 ("Act") provides a safe harbor for forward-looking statements to encourage companies to provide prospective information, so long as those statements are identified as forward-looking and are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those discussed in the statements. We wish to take advantage of the "safe harbor" provisions of the Act.
Certain statements in this Report are forward-looking statements within the meaning of the Act, and such statements are intended to qualify for the protection of the safe harbor provided by the Act. All statements other than statements of historical fact included in this Report are forward-looking statements, and such statements are subject to risks and uncertainties. You can identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. Forward-looking statements give our current expectations and projections as to future performance, occurrences and trends, including statements expressing optimism or pessimism about future results or events. The words "anticipate," "estimate," "expect," "objective," "goal," "project," "intend," "plan," "believe," "assume," "will," "should," "may," "can have," "likely," "target," "forecast," "guide," "guidance," "outlook," "seek," "strategy," "future," and similar words or expressions identify forward-looking statements. Similarly, all statements we make relating to our strategies, plans, goals, objectives and targets as well as our estimates and projections of results, sales, earnings, costs, expenditures, cash flows, growth rates, initiatives, and the outcomes or impacts of pending or threatened litigation or regulatory actions are also forward-looking statements.
Forward-looking statements are based upon a number of assumptions and factors
concerning future conditions that may ultimately prove to be inaccurate and
could cause actual results to differ materially from those in the
forward-looking statements. Forward-looking statements, whether made herein,
disclosed previously or in our other releases, reports or filings made with the
Many of the risks and uncertainties that we face are currently amplified by, and will continue to be amplified by, factors related to the Chapter 11 Cases (as defined herein), including:
• our ability to obtain confirmation of a plan of reorganization under the
Chapter 11 Cases and successfully consummate the restructuring, including
by satisfying the conditions and milestones in the Restructuring Support
Agreement (as defined herein);
• our ability to improve our liquidity and long-term capital structure and to
address our debt service obligations through the restructuring and the
potential adverse effects of the Chapter 11 Cases on our liquidity and
results of operation;
• our ability to obtain timely approval by the Bankruptcy Court (as defined
herein) with respect to the motions filed in the Chapter 11 Cases;
• objections to the Company's recapitalization process or other pleadings
filed that could protract the Chapter 11 Cases and third party motions
which may interfere with Company's ability to consummate the restructuring
contemplated by the Restructuring Support Agreement or an alternative
restructuring;
• the length of time that the Company will operate under Chapter 11
protection and the continued availability of operating capital during the
pendency of the Chapter 11 Cases;
• increased administrative and legal costs related to the Chapter 11 process;
• potential delays in the Chapter 11 process due to the effects of the
COVID-19 pandemic;
• the effects of the restructuring and the Chapter 11 Cases on the Company
and the interests of various constituents;
• our substantial level of indebtedness and related debt service obligations
and restrictions, including those expected to be imposed by covenants in
any exit financing, that may limit our operational and financial
flexibility; and
• our ability to continue as a going concern and our ability to maintain
relationships with suppliers, customers, employees and other third parties
as a result of such going concern, the restructuring and the Chapter 11
Cases.
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Forward-looking statements are and will be based upon our views and assumptions regarding future events and operating performance at the time the statements are made, and are applicable only as of the dates of such statements. We believe the expectations expressed in the forward-looking statements we make are based on reasonable assumptions within the bounds of our knowledge. However, forward-looking statements, by their nature, involve assumptions, risks, uncertainties and other factors, many of these factors are beyond our control, and any one or a combination of which could materially affect our business, financial condition, results of operations or liquidity.
Additional important assumptions, risks, uncertainties and other factors
concerning future conditions that could cause actual results and financial
condition to differ materially from our expectations, or cautionary statements,
are disclosed under the sections entitled "Risk Factors" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in
this Report and in the Form 10-K, and may be discussed from time to time in our
other filings with the
We caution you not to place undue reliance on forward-looking statements. The
important factors referenced above may not contain all of the factors that are
important to you. In addition, we cannot assure you that we will realize the
results or developments we expect or anticipate or, even if substantially
realized, that they will result in the consequences or affect us or our
operations in the way we expect. We expressly disclaim any obligation to update
or revise any forward-looking statement as a result of new information, future
events or otherwise, except as otherwise required by law. You are advised,
however, to consult any further disclosures we make on related subjects in our
public announcements and
The financial information, discussion and analysis that follow should be read in conjunction with our condensed consolidated financial statements and the related notes included in this Report as well as the financial and other information included in the Form 10-K.
Overview
We are a leading provider of diversified mineral-based and material solutions
for the Industrial and Energy markets. We produce a wide range of specialized
silica sand, nepheline syenite, feldspar, calcium carbonate, clay, and kaolin
products for use in the glass, ceramics, coatings, metals, foundry, polymers,
construction, water filtration, sports and recreation, and oil and gas markets
in
Our operations are organized into two segments based on the primary end markets
we serve - Energy and Industrial. Our Energy segment offers the oil and gas
industry a comprehensive portfolio of raw frac sand, value-added proppants,
well-cementing additives, gravel-packing media and drilling mud additives. Our
Energy segment products serve hydraulic fracturing operations in the
We believe our segments are complementary. Our ability to sell products to a wide range of customers across multiple end markets allows us to maximize the recovery of our reserve base within our mining operations and to mitigate the cyclicality of our earnings.
Our Strategy
Our strategy is centered on three objectives - repositioning our Energy segment, growing our Industrial segment's profitability and strengthening our balance sheet.
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Recent Trends and Outlook
Voluntary Reorganization under Chapter 11
On
The Chapter 11 process can be unpredictable and involves significant risks and uncertainties. As a result of these risks and uncertainties, the amount and composition of the Company's assets, liabilities, officers and/or directors could be significantly different following the outcome of the Chapter 11 cases, and the description of the Company's operations, properties and liquidity and capital resources included in this quarterly report may not accurately reflect its operations, properties and liquidity and capital resources following the Chapter 11 process. For additional information regarding such risks, please see Part II-Item 1A-Risk Factors.
The Company expects to continue working on a business plan of reorganization and
engage with certain of the Company's creditors under the Term Loan and the
In addition, prior to the commencement of the Chapter 11 Cases, the Company
entered into a restructuring support agreement (the "Restructuring Support
Agreement") with certain parties (the "Consenting Stakeholders"). Under the
Restructuring Support Agreement, the Plan must be confirmed and declared
effective by the
COVID-19 pandemic
The COVID-19 pandemic and related economic impacts have created significant
volatility and uncertainty in our business. Oil prices have declined sharply due
to lower demand which has in turn significantly reduced well completion activity
in
The COVID-19 pandemic has also caused, and is likely to continue to cause,
economic, market and other disruptions throughout
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These events created only modest impacts to our first quarter results, however,
we expect a significant impact to revenue and profitability for the remainder of
2020 across both segments. In response to these market conditions, the Company
has taken several steps to further reduce active capacity within our Energy
segment and lower operational and overhead costs throughout the Company. These
actions include the idling of our
The full extent to which our business is affected by COVID-19 will depend on various factors and consequences beyond our control, such as the duration and magnitude of the pandemic, additional actions by businesses and governments in response to the pandemic, the speed and effectiveness of responses to combat the virus, and the effects of low oil prices on the global economy generally. These effects could have a significant adverse effect on the markets in which we conduct our business and the demand for our products and services, as described in "Item 1A. Risk Factors" of this Report.
Energy proppant trends
Demand for proppant is significantly influenced by the level of well completions
by exploration and production ("E&P") and oil field services ("OFS") companies,
which depends largely on the current and anticipated profitability of developing
oil and natural gas reserves. The type of proppant used in wells depends on a
variety of factors, including cost and desired size, sphericity, roundness, and
crush strength. Over the last two years, substantial "local" frac sand reserves
have developed primarily within the Permian,
Proppant supply grew throughout 2018 and in early 2019, driven primarily by
significant growth in the supply of new local plants in the Permian,
The total amount of local sand supply brought to market has significantly
exceeded market demand and has resulted in lower volumes and prices for
From the beginning of 2020 through mid-March, completions activity began to seasonally increase as budgets were refreshed, but fell dramatically in late March as oil prices fell as a result of the COVID-19 virus and threats of production increases from OPEC+ members.
Industrial end market trends
Our Industrial segment's products are sold to customers in the glass,
construction, ceramics, metals, foundry, coatings, polymers, sports and
recreation, filtration and various other industries. The sales in our Industrial
segment correlate strongly with overall economic activity levels as reflected in
the gross domestic product, unemployment levels, vehicle production and growth
in the housing market. In the first quarter of 2020, overall sales within our
Industrial segment remained solid with certain sectors (including containerized
glass and coatings and polymers) providing above-average growth due to consumer,
regulatory and/or manufacturing trends. Over the long term, we expect our
Industrial segment to align with rates similar to
Key Metrics Used to Evaluate Our Business
Our management uses a variety of financial and operational metrics to analyze our performance across our Energy and Industrial segments. We determine our reportable segments based on the primary industries we serve, our management structure and the financial information reviewed by our chief operating decision maker in deciding how to allocate resources and assess performance. We evaluate the performance of our segments based on their volumes sold, average selling price, and segment contribution margin
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and associated per ton metrics. We evaluate the performance of our business based on company-wide operating cash flows, earnings before interest, taxes, depreciation and amortization ("EBITDA"), costs incurred that are considered non-operating, and Adjusted EBITDA. Segment contribution margin, EBITDA, and Adjusted EBITDA are defined in the Non-GAAP Financial Measures section below. We view these metrics as important factors in evaluating profitability and review these measurements frequently to analyze trends and make decisions, and believe these metrics provide beneficial information for investors for similar reasons.
Segment Gross Profit
Segment gross profit is defined as segment revenue less segment cost of sales, excluding depreciation, depletion and amortization expenses, selling, general, and administrative costs, and corporate costs.
Non-GAAP Financial Measures
Segment contribution margin, EBITDA, Adjusted EBITDA are supplemental non-GAAP financial measures used by management and certain external users of our financial statements in evaluating our operating performance.
Segment contribution margin is a key metric we use to evaluate our operating performance and to determine resource allocation between segments. We define segment contribution margin as segment revenue less segment cost of sales, excluding any depreciation, depletion and amortization expenses, selling, general, and administrative costs, and operating costs of idled facilities and excess railcar capacity. Segment contribution margin per ton is defined as segment contribution margin divided by tons sold. Segment contribution margin is not a measure of our financial performance under GAAP and should not be considered an alternative or superior to measures derived in accordance with GAAP. Refer to Note 18 for further detail, including a reconciliation of operating loss from continuing operations, the most directly comparable GAAP financial measure, to segment contribution margin.
We define EBITDA as net income before interest expense, income tax expense (benefit), depreciation, depletion and amortization. Adjusted EBITDA is defined as EBITDA before non-cash stock-based compensation and certain other income or expenses, including restructuring and other charges, impairments, and Merger-related expenses. Beginning in the first quarter of 2019, we also include non-cash lease expense of intangible assets in our calculation of Adjusted EBITDA as a result of the adoption of ASC 842.
We believe EBITDA and Adjusted EBITDA are useful because they allow management to more effectively evaluate our normalized operations from period to period as well as provide an indication of cash flow generation from operations before investing or financing activities. Accordingly, EBITDA and Adjusted EBITDA do not take into consideration our financing methods, capital structure or capital expenditure needs. As previously noted, Adjusted EBITDA excludes certain non-operational income and/or costs, the removal of which improves comparability of operating results across reporting periods. However, EBITDA and Adjusted EBITDA have limitations as analytical tools and should not be considered as alternatives to, or more meaningful than, net income as determined in accordance with GAAP as indicators of our operating performance. Certain items excluded from EBITDA and 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 components of EBITDA or Adjusted EBITDA.
Additionally, Adjusted EBITDA is not intended to be a measure of free cash flow for management's discretionary use, as it does not consider certain cash requirements such as interest payments, tax payments and debt service requirements. Adjusted EBITDA contains certain other limitations, including the failure to reflect our cash expenditures, cash requirements for working capital needs and cash costs to replace assets being depreciated and amortized, and excludes certain non-operational charges. We compensate for these limitations by relying primarily on our GAAP results and by using Adjusted EBITDA only as a supplement. Non-GAAP financial information should not be considered in isolation or viewed as a substitute for measures of performance as defined by GAAP.
Although we attempt to determine EBITDA and Adjusted EBITDA in a manner that is consistent with other companies in our industry, our computation of EBITDA and Adjusted EBITDA may not be comparable to other similarly titled measures of other companies due to potential inconsistencies in the methods of calculation. We believe that EBITDA and Adjusted EBITDA are widely followed measures of operating performance.
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The following table sets forth a reconciliation of net income, the most directly comparable GAAP financial measure, to EBITDA and Adjusted EBITDA:
Three Months Ended March 31,
2020 2019
(in thousands)
Reconciliation of EBITDA and Adjusted EBITDA
Net loss from continuing operations attributable to
$ (941 ) $ (52,245 ) Interest expense, net 23,583 25,603 Benefit from income taxes (28,252 ) (4,054 ) Depreciation, depletion, and amortization expense 34,830 58,095 EBITDA 29,220 27,399 Non-cash stock compensation expense(1) 1,650 2,767 Restructuring and other charges(2) 5,499 2,002 Costs and expenses related to the Merger and integration(3) - 651 Non-cash charges relating to operating leases(4) - 2,100 Adjusted EBITDA (non-GAAP)$ 36,369 $ 34,919
_____________
(1) Represents the non-cash expense for stock-based awards issued to our employees and
outside directors. Stock compensation expenses are reported in Selling, general and
administrative expenses.
(2) Represents expenses associated with restructuring activities as a result of the
Merger and idled facilities, strategic costs, other charges related to executive
severance and benefits, as well as restructuring-related SG&A expenses.
(3) Costs and expenses related to the Merger and integration include legal,
accounting, financial advisory services, severance, debt extinguishment, integration
and other expenses.
(4) Represents the amount of operating lease expense incurred in 2019 related to
intangible assets that were reclassified to Operating right-of-use assets, net on the
Consolidated Balance Sheets, as a result of the adoption of ASC 842. The expense,
previously recognized as non-cash amortization expense, is now recognized in Cost of
goods sold (excluding depreciation, depletion, and amortization shown separately) on
the Consolidated Statement of Loss.
Results of Operations
Three Months Ended March 31,
2020 2019
(in thousands)
Operating Data
Energy
Tons sold 3,471 4,432
Revenues $ 152,373 $ 236,075
Segment gross profit 14,586 15,064
Segment contribution margin
3,316 3,565
Revenues $ 170,287 $ 192,171
Segment gross profit 54,200 51,622
Segment contribution margin
6,787 7,997
Revenues $ 322,660 $ 428,246
Segment gross profit 68,786 66,686
Segment contribution margin
Three Months Ended
Revenues
Revenues were
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revenues decreased as a result of lower volumes, pricing and unfavorable product
mix. The first quarter of 2020 was also adversely impacted by effects of the
COVID-19 pandemic and the related business disruption in
Revenues in the Energy segment were
Revenues in the Industrial segment were
Segment Gross Profit and Contribution Margin
Gross profit was
Contribution margin was
Energy segment gross profit was
Industrial segment gross profit was
Selling, General and Administrative Expenses
Selling, general and administrative expenses ("SG&A") decreased
Depreciation, Depletion and Amortization
Depreciation, depletion and amortization ("DD&A") decreased
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depreciable base of existing property, plant, and equipment. In the fourth
quarter of 2019, an impairment charge of approximately
Restructuring and Other Charges
In the three months ended
Other Operating Income, net
Other operating income, net decreased
Operating Loss from Continuing Operations
Operating loss from continuing operations decreased approximately
Interest Expense, net
Interest expense decreased
Other Non-Operating Expense, net
Other non-operating expense, net increased
Benefit for Income Taxes
The benefit for income taxes increased
The effective tax rate was 96.7% and 7.2% for the three months ended
In response to the economic impact of the coronavirus (COVID-19) pandemic, on
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2021 to be carried back to each of the five tax years preceding the tax year of
such loss. In addition, the CARES Act removed the limitation that net operating
losses generated after 2017 could only offset 80% of taxable income. For the
quarter ending
The provision for income taxes for interim periods is determined using an estimate of our annual effective tax rate, adjusted for discrete items that are taken into account in the relevant period. Each quarter, we update our estimate of the annual effective tax rate. If our estimated effective tax rate changes, we make a cumulative adjustment.
Net Loss Attributable to
Net loss attributable to
Adjusted EBITDA
Adjusted EBITDA increased
Liquidity and Capital Resources
Overview
Our liquidity is principally used to service our debt, meet our working capital needs, and invest in both maintenance and growth capital expenditures. Due to impacts of the macroenvironment, industry, and other company-specific factors, we have taken significant actions to reduce our working capital requirements, our overhead costs, monetizing certain non-core assets within our portfolio and other actions to maintain adequate liquidity and reduce capital requirements. Historically, we have met our liquidity and capital investment needs with funds generated from operations and the issuance of debt, if necessary.
Our principal sources of liquidity are cash on-hand and cash flow from operations, both now and in the near future. Our operations are capital intensive and short-term capital expenditures related to certain strategic projects can be substantial.
On
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Term Loan
The Term Loan provides us flexibility to raise additional debt, including at
least
Interest on the Term Loan accrues at a per annum rate of either (at our option)
(a) LIBOR plus a spread or (b) the alternate base rate plus a spread. The spread
will vary depending on our total net leverage ratio, defined as the ratio of
debt (less up to
Term Loan
Applicable Applicable
Margin for Margin for ABR
Leverage Ratio Eurodollar Loans Loans
Greater than or equal to 2.50x 4.00% 3.00%
Greater than or equal to 2.0x and less than
2.50x 3.75% 2.75%
Greater than or equal to 1.50x and less
than 2.0x 3.50% 2.50%
Less than 1.50x 3.25% 2.25%
The table below provides certain financial metrics for guarantor subsidiaries and non-guarantor subsidiaries:
Guarantor Non-Guarantor Total
Revenues $ 256,560 $ 66,100 $ 322,660
Gross profit 44,031 24,755 68,786
EBITDA 15,316 13,904 29,220
Adjustments 7,149 - 7,149
Adjusted EBITDA $ 22,465 $ 13,904 $ 36,369 The Term Loan contains customary representations and warranties, affirmative covenants, negative covenants and events of default. Negative covenants include, among others, limitations on debt, liens, asset sales, mergers, consolidations and fundamental changes, dividends and repurchases of equity securities, repayments or redemptions of subordinated debt, investments, transactions with affiliates, restrictions on granting liens to secure obligations, restrictions on subsidiary distributions, changes in the conduct of the business, amendments and waivers in organizational documents and junior debt instruments and changes in the fiscal year. The filing of the Chapter 11 Cases constituted an event of default under the Term Loan.
See Note 4 in the consolidated financial statements included in this Report for further detail regarding the Term Loan.
As of
Receivables Facility
On
Pursuant to the terms of the Sub-PSA, the Sub-Originators will sell its
receivables to
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an obligation of Covia Financing and not the Sub-Originators or
Amounts outstanding under the Receivables Facility accrue interest based on
LIBOR Market Index Rate, provided that Covia Financing may select adjusted LIBOR
for a tranche period. The Receivables Facility terminates on
There were no borrowings under the Receivables Facility at
The filing of the Chapter 11 Cases constituted an event of default under the Receivables Facility.
Working Capital
Working capital is the amount by which current assets (excluding cash and cash
equivalents and assets held for sale) exceed current liabilities (excluding
current portion of long-term debt) and represents a measure of
liquidity.
Cash Flow Analysis
Operating activities consist primarily of net income adjusted for non-cash items, including depreciation, depletion, and amortization, the gain on the sale of subsidiaries, impairment charges, and the effect of changes in working capital.
Net cash used in operating activities was
Investing activities in the current period consist primarily of capital expenditures for maintenance; however, the Company typically utilizes cash for both growth and maintenance projects. Capital expenditures generally consist of expansions of production or terminal facilities, land and reserve acquisition or maintenance related expenditures for asset replacement and health, safety, and quality improvements.
Net cash used in investing activities was
Capital expenditures were
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primarily focused on completing our
Net cash used in financing activities was
Seasonality
Our business is affected by seasonal fluctuations in weather that impact our production levels and our customers' business needs. For example, our Energy segment sales levels are lower in the first and fourth quarters due to lower market demand as adverse weather tends to slow oil and gas operations to varying degrees depending on the severity of the weather. In addition, our inability to mine and process sand year-round at certain of our surface mines results in a seasonal build-up of inventory as we mine sand to build a stockpile that will feed our drying facilities during the winter months. Additionally, in the second and third quarters, we sell higher volumes to our customers in our Industrial segment's end markets due to the seasonal rise in demand driven by more favorable weather conditions.
Off-Balance Sheet Arrangements
We have no undisclosed off-balance sheet arrangements that have or are likely to have a current or future material impact on our financial condition, results of operations, liquidity, capital expenditures, or capital resources.
Contractual Obligations
Other than as disclosed elsewhere in this report with respect to the filing of the Chapter 11 Cases and the acceleration of substantially all of our debt as a result, there have been no material changes outside of the ordinary course of our business to the contractual arrangements disclosed in our "Contractual Obligations" table in "Management's Discussion and Analysis of Financial Condition and Results of Operations" of the Form 10-K.
Environmental Matters
We are subject to various federal, state and local laws and regulations governing, among other things, hazardous materials, air and water emissions, environmental contamination and reclamation and the protection of the environment and natural resources. We have made, and expect to make in the future, expenditures to comply with such laws and regulations, but cannot predict the full amount of such future expenditures. We may also incur fines and penalties from time to time associated with noncompliance with such laws and regulations.
As of
Critical Accounting Policies and Estimates
Our unaudited condensed consolidated financial statements have been prepared in conformity with GAAP, which requires management to make estimates and assumptions that affect the reported amount of assets and liabilities at the date of our financial statements and the reported amounts of revenues and expenses during the reporting period. While we do not believe that the reported amounts would be materially different, application of these policies involves the exercise of judgment and the use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates. We evaluate our estimates and judgments on an ongoing basis. We base our estimates on experience and various other assumptions that we believe are reasonable under the circumstances. All of our significant accounting policies, including certain critical accounting policies and estimates, are disclosed in our Form 10-K.
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Recent Accounting Pronouncements
Refer to Note 1 of our unaudited condensed consolidated financial statements included in this Report.
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