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
Securities and Exchange Commission (the "SEC" or the "Commission"), are subject
to risks and uncertainties and they are not guarantees of future
performance. Actual results may differ materially from those discussed in
forward-looking statements, thus negatively affecting our business, financial
condition, results of operations or liquidity.
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
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 11protection 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;
38
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• 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;
• the Company's ability to access debt or equity markets on favorable terms
or at all;
• risks arising from the delisting of the Company's common stock from the New
• 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.
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 SEC , including Quarterly Reports on Form 10-Q and Current
Reports on Form 8-K. All written and oral forward-looking statements
attributable to us, or to persons acting on our behalf, are expressly qualified
in their entirety by these cautionary statements as well as other cautionary
statements that are made from time to time in our other SEC filings and public
communications. You should evaluate all forward-looking statements made in this
Report in the context of these risks and uncertainties.
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 SEC filings.
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.
Current Bankruptcy Proceedings
OnJune 29, 2020 , the Company and certain of the Company's direct and indirectU.S. subsidiaries (collectively, the "Company Parties") filed voluntary petitions for relief (the "Chapter 11 Cases") under chapter 11 of title 11 of the United States Code (the "Bankruptcy Code") in theSouthern District ofTexas , Houston Division (the "Bankruptcy Court ").
The Chapter 11 Cases are being administered under the caption In re:
For more information regarding the impact of the Chapter 11 Cases, see Liquidity
After Filing the Chapter 11 Cases in this Management's Discussion and Analysis
of Financial Condition and Results of Operations and Note 1 to our condensed
consolidated financial statements.
39
--------------------------------------------------------------------------------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 inNorth America and around the world. We currently have 33 active mining facilities with over 25 million tons of annual mineral processing capacity and two active coating facilities with over 320 thousand tons of annual coating capacity. Our mining and coating facilities spanNorth America and also include operations inChina andDenmark . OurU.S. ,Mexico , andCanada operations have many sites in close proximity to our customer base.Covia began operating in its current form following a business combination betweenFairmount Santrol Holdings Inc. ("Fairmount Santrol") andUnimin Corporation ("Unimin") pursuant to whichFairmount Santrol was merged into a wholly-owned subsidiary of Unimin,Bison Merger Sub, LLC ("Merger Sub"), with Merger Sub as the surviving entity following the merger (the "Merger"). The Merger was completed onJune 1, 2018 (the "Merger Date"). 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 theU.S. ,Canada ,Argentina ,Mexico ,China , and northernEurope . Our Industrial segment provides raw, value-added, and custom-blended products to the glass, construction, ceramics, metals, foundry, coatings, polymers, sports and recreation, filtration and various other industries, primarily inNorth America . 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 - growing our Industrial segment's profitability, repositioning our Energy segment and strengthening our balance sheet. Recent Trends and Outlook
Voluntary Reorganization under Chapter 11
OnJune 29, 2020 ("Petition Date"), the Company Parties commenced voluntary cases under the Bankruptcy Code in theUnited States Bankruptcy Court for the Southern District of Texas , Houston Division. Primary factors causing us to file for Chapter 11 protection included unsustainable long-term debt obligations and significant excess operating costs, driven by the economic slowdown caused by COVID-19. 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 Report may not accurately reflect its operations, properties and liquidity and capital resources following the Chapter 11 process. For further discussion, see Note 1 to our condensed consolidated financial statements and those risk factors discussed under "Risk Factors" in Part II, Item 1A of this Report. The Company expects to continue working on a business plan of reorganization and engage with certain of the Company's creditors under its Credit and Guaranty Agreement, dated as ofJune 1, 2018 (as amended or otherwise modified from time to time, the "Term Loan Agreement") and theBankruptcy Court in order to confirm a Chapter 11 plan of reorganization, as applicable. The Company Parties have received initial approval from theBankruptcy Court to maintain ordinary course operations and uphold their respective commitments to their stakeholders, including employees, customers, and vendors, during the restructuring process, subject to the jurisdiction of theBankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code. The commencement of the Chapter 11 Cases constituted an event of default under, and resulted in the acceleration of, substantially all of the Company Parties' debt obligations. While the Chapter 11 Cases are pending, the Company Parties do not anticipate making interest payments due under their respective debt obligations, except for the Company's letter of credit facility, which was entered into after the commencement of the Chapter 11 Cases. 40 -------------------------------------------------------------------------------- In connection with the Chapter 11 Cases, the Company Parties entered into a Restructuring Support Agreement (the "Restructuring Support Agreement") with certain creditors (the "Consenting Stakeholders"), which contemplated agreed-upon terms for a prearranged plan of reorganization (the "Plan"). Under the Restructuring Support Agreement, the Consenting Stakeholders agreed, subject to certain terms and conditions, to support a financial restructuring of the existing debt of, existing equity interests in, and certain other obligations of the Company Parties, pursuant to the Plan as filed with theBankruptcy Court . Under the Restructuring Support Agreement, the Plan must be confirmed and declared effective by theBankruptcy Court no later than 150 days after the Petition Date. Under the Bankruptcy Code, a majority in number and two-thirds in amount of each impaired class of claims must approve the Plan. The Restructuring Support Agreement requires the Consenting Stakeholders to vote in favor of and support the Plan, and the Consenting Stakeholders represent the requisite number of votes for the Term Loan's class of creditors entitled to vote on the Plan. The Restructuring Support Agreement may be terminated by one or more of the Consenting Stakeholders or the Company, or theBankruptcy Court may refuse to confirm the Plan.
For more information regarding the impact of the Chapter 11 Cases, see Liquidity After Filing the Chapter 11 Cases and Note 1 to our condensed consolidated financial statements.
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 in 2020 due to lower demand which significantly reduced well completion activity inNorth America and the corresponding demand for proppants. Despite efforts to reduce the supply of oil from theOrganization of Petroleum Exporting Countries and other oil producing nations ("OPEC+"), excess oil inventory remains and has resulted in a severe downturn in completion activity for the foreseeable future. The COVID-19 pandemic has also caused, and is likely to continue to cause, economic, market and other disruptions throughoutNorth America , which affected our Industrial segment throughout the first half of 2020. In particular, we experienced declines in volumes in the second quarter of 2020 from customers who either experienced reduced end market demand or were temporarily idled due to quarantine mandates. These reduced volumes occurred across most of our end markets within our Industrial segment. Although we experienced an increase in volumes in the latter half of the second quarter of 2020, it remains unclear how long the effects of the COVID-19 pandemic will negatively impact longer-term demand for our products. Certain areas of our business began to stabilize inJune 2020 particularly in our Industrial end market businesses, 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 reduction of productive capacity of ourKermit ,Crane ,Seiling andUtica facilities, and reducing headcount across the Company while tightly controlling discretionary spending across the Company. The full extent to which our business is affected by the COVID-19 pandemic will depend on various factors and consequences beyond our control, including 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. 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 were developed primarily within the Permian,Eagle Ford , and Mid-Con basins. The quality of local proppants differs fromNorthern White Sand in that local proppant generally possesses lower crush strength and less sphericity, however their delivered costs are substantially lower. Given their lower costs, demand for local proppant products has strengthened considerably and has taken substantial market share fromNorthern White Sand in the markets where it is available. 41
-------------------------------------------------------------------------------- Proppant supply grew throughout 2018 and in early 2019, driven primarily by significant growth in the supply of new local plants in the Permian,Eagle Ford , and Mid-Con basins. Most local plants were developed to supply local basins in which they are located and lack the logistical infrastructure to economically ship product to other basins. We commissioned local facilities inCrane, Texas andKermit, Texas in the Permian basin in the third quarter of 2018, each with three million tons of annual production capacity, and a local facility inSeiling, Oklahoma in the Mid-Con basin in the fourth quarter of 2018 with two million tons of annual production capacity. During the second quarter of 2020, due to the continued reduction in demand in thePermian Basin , the Company reduced the production capacity of itsKermit ,Crane ,Seiling andUtica facilities. The total amount of local sand supply brought to market has significantly exceeded market demand and has resulted in lower volumes and prices forCovia . In response to these dynamics,Covia has taken significant steps to match its productive capacity to market demand through the idling of 25 million tons of capacity over the last two years, including operations at mines inUtica, Illinois ;Kasota, Minnesota ;Shakopee, Minnesota ; Brewer,Missouri ;Voca, Texas ;Maiden Rock, Wisconsin ; andWexford, Michigan and at our resin coating facilities in Cutler,Missouri ;Guion, Arkansas ; andRoff, Oklahoma . Additionally, we reduced production capacity and total production at certain of our Northern White sand plants. This has allowed us to lower fixed plant costs and consolidate volumes into lower cost operations. In addition, the Company recorded a$1.4 billion impairment to its Northern White andSeiling asset groups at the end of 2019. The reduced capacity of theKermit, Texas andCrane, Texas facilities has resulted in an impairment loss recognized in the three-months endedJune 30, 2020 of approximately$288.2 million . Following the onset of the Covid-19 pandemic, oil prices declined into negative levels, resulting in a dramatic decline in completions activity which severely impacted our sales volumes of frac sand. Inventory levels of oil, together with the low price of both oil and natural gas are expected to depress demand for our products for the foreseeable future. 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. Beginning in the second quarter of 2020, with the onset of the Covid-19 pandemic, demand for many of our industrial products began to decline compared to the second quarter of 2019 due to lower demand for end market applications and disruptions to our customers production facilities. Over the long term, we expect our Industrial segment to align with rates similar toU.S. gross domestic product ("GDP") growth.
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 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.
42
--------------------------------------------------------------------------------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 19 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, reorganization items, net 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. Further, we expect that significant impacts will result from the reorganization under the Chapter 11 Cases, including the settlement of prepetition liabilities for amounts lesser than the carrying amounts atJune 30, 2020 , as well as professional fees including advisory and legal fees as we complete our reorganization process. 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. 43 --------------------------------------------------------------------------------
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 June
30, Six Months Ended June 30,
2020 2019 2020 2019
(in thousands) (in thousands)
Reconciliation of EBITDA and
Adjusted EBITDA
Net loss from continuing operations
attributable to Covia $ (435,622 ) $ (34,394 ) $ (436,563 ) $ (86,639 )
Interest expense, net 59,340 27,866 82,923 53,002
Benefit from income taxes (1,407 ) (5,136 ) (29,659 ) (9,190 )
Depreciation, depletion, and
amortization expense 31,209 59,204 66,039 117,299
EBITDA (346,480 ) 47,540 (317,260 ) 74,472
Non-cash stock compensation expense1 180 3,316 1,830 6,082
Asset impairments2 298,299 - 298,299 -
Restructuring and other charges3 29,414 12,124 34,913 14,126
Reorganization items, net4 24,316 - 24,316 -
Loss on sale of subsidiary5 964 - 964 -
Costs and expenses related to the
Merger and integration6 - 245 - 896
Non-cash charges relating to
operating leases7 - 2,100 - 4,200
Adjusted EBITDA (non-GAAP) $ 6,693 $ 65,325 $ 43,062 $ 99,776
_____________
(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 the impairment of long-lived assets in the Energy segment in 2020.
(3) 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.
(4) Represents the Term Loan deferred financing costs, net that were expensed as a result of the Company's
Chapter 11 Cases.
(5) Represents the final working capital adjustments associated with the sale of our Winchester & Western
Railroad .
(6) Costs and expenses related to the Merger and integration include legal, accounting, financial advisory
services, severance, integration and other expenses.
(7) 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
Statements of Loss.
Results of Operations
Three Months Ended June 30, Six Months Ended June 30,
2020 2019 2020 2019
(in thousands) (in thousands)Operating Data Energy Tons sold 1,323 4,582 4,794 9,014 Revenues$ 68,612 $ 251,547 $ 220,985 $ 487,622 Segment gross profit (loss) (10,279 ) 33,858 4,307 48,922 Segment contribution margin$ 3,380 $ 40,912 $ 24,894 $ 62,931 Industrial Tons sold 2,844 3,596 6,160 7,161 Revenues$ 150,921 $ 193,389 $ 321,208 $ 385,560 Segment gross profit 48,578 65,109 102,778 116,731 Segment contribution margin$ 48,578 $ 65,109 $ 102,778 $ 116,731 Totals Tons sold 4,167 8,178 10,954 16,175 Revenues$ 219,533 $ 444,936 $ 542,193 $ 873,182 Segment gross profit 38,299 98,967 107,085 165,653 Segment contribution margin$ 51,958 $ 106,021 $ 127,672 $ 179,662 44
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Three Months Ended
Revenues Revenues were$219.5 million for the three months endedJune 30, 2020 compared to$444.9 million for the three months endedJune 30, 2019 , a decrease of$225.4 million , or 51%. Volumes were 4.2 million tons for the three months endedJune 30, 2020 compared to 8.2 million tons for the three months endedJune 30, 2019 , a decrease of 4.0 million tons, or 49%. Our volumes and revenues decreased as a result of declining demand across both segments, mainly in connection with the drop in oil production and the effects of the COVID-19 pandemic on key end-markets served by our business. Likewise, a decline in the average selling price during the second quarter of 2020 compared to the second quarter of 2019 unfavorably impacted revenues. Revenues in the Energy segment were$68.6 million for the three months endedJune 30, 2020 compared to$251.5 million for the three months endedJune 30, 2019 , a decrease of$182.9 million , or 73%. The decline in revenues was driven by lower sales volumes and realized pricing due to weakened market conditions within the Energy segment during the three months endedJune 30, 2020 . Factors driving the lower revenues included steep declines in oil prices and significantly lower completion activity. Volumes sold into the Energy segment were 1.3 million tons in the three months endedJune 30, 2020 , compared to 4.6 million tons in the three months endedJune 30, 2019 , a decrease of 3.3 million tons, or 72%. Revenues in the Industrial segment were$150.9 million for the three months endedJune 30, 2020 compared to$193.4 million for the three months endedJune 30, 2019 , a decrease of$42.5 million , or 22%. Volumes sold into the Industrial segment were 2.8 million tons in the three months endedJune 30, 2020 , compared to 3.6 million tons for the three months endedJune 30, 2019 , a decrease of 0.8 million tons, or 22%. Revenue and volume decreases were primarily attributed to the sale of ourCalera, Alabama lime processing facility andWinchester & Western Railroad in the third quarter of 2019, which accounted for$15.3 million of revenue for the three months endedJune 30, 2019 , and lower transportation-related revenues for freight charged to customers.
Segment Gross Profit (Loss) and Contribution Margin
Segment gross profit was$38.3 million for the three months endedJune 30, 2020 compared to gross profit of$99.0 million for the three months endedJune 30, 2019 , a decrease of$60.7 million , or 61%. The segment gross profit decrease was primarily due to the decrease in sales volumes, pricing, and railcar lease expense for the three months endedJune 30, 2020 . Due to the impairment charge recognized in the fourth quarter of 2019, which significantly reduced our "operating right-of-use assets" recorded on our Condensed Consolidated Balance Sheets, we are recognizing less lease expense, largely related to railcars, in the current period versus the prior year comparable period. Hybrid facilities, which produce for both the Industrial and Energy segments, were negatively impacted by lower utilization as demand declined. Segment contribution margin was$52.0 million in the three months endedJune 30, 2020 and excludes$13.7 million of operating costs of idled facilities and excess railcar costs. Segment contribution margin was$106.0 million in the three months endedJune 30, 2019 and excludes$1.1 million of operating costs of idled facilities and$6.0 million of excess railcar capacity costs. These excluded costs are entirely attributable to the Energy segment. Energy segment gross profit was a loss of$10.3 million for the three months endedJune 30, 2020 compared to profit of$33.9 million for the three months endedJune 30, 2019 , a decrease of$44.2 million , or 130%. The Energy segment gross profit decrease was primarily due to lower volumes driven by an oversupplied market as a result of the Covid-19 pandemic. Industrial segment gross profit was$48.6 million for the three months endedJune 30, 2020 compared to$65.1 million for the three months endedJune 30, 2019 , a decrease of$16.5 million , or 25%. The decrease in Industrial segment gross profit was primarily due to reductions in demand and sales volume caused by the North American business closures due to the COVID-19 pandemic and the sale of ourCalera, Alabama processing facility andWinchester & Western Railroad in the third quarter of 2019. Offsetting these volume declines were plant cost improvements, which included reductions in workforce and the reduction of production capacity at ourKermit ,Crane ,Seiling andUtica facilities, compared to the second quarter of 2019. 45 --------------------------------------------------------------------------------
Selling, General and Administrative Expenses
Selling, general and administrative expenses ("SG&A") decreased $8.9 million , or
23%, to $29.7 million for the three months ended June 30, 2020 compared to $38.6
million for the three months ended June 30, 2019 . SG&A for the three months
ended June 30, 2020 included $0.2 million of stock compensation expense compared
to $3.3 million of stock compensation expense in the three months ended June 30,
2019 , driven by lower grant activity in the current year versus the prior
year. The remainder of the decrease is primarily due to the effects of headcount
reductions, which drove lower salaries and benefit levels, as well as other
overhead cost reductions since June 30, 2019 .
Depreciation, Depletion and Amortization
Depreciation, depletion and amortization ("DD&A") decreased $28.0 million , or
47%, to $31.2 million for the three months ended June 30, 2020 , compared to
$59.2 million in the three months ended June 30, 2019 . Depreciation of property,
plant, and equipment and amortization expense decreased in the second quarter of
2020 compared to the second quarter of 2019 due to a lower depreciable base of
existing property, plant, and equipment as well as the sale of the Calera Lime
facility. In the fourth quarter of 2019, an impairment charge of approximately
$1.4 billion , primarily related to the long-lived assets of our Energy segment,
was the driver of the lower depreciation in the current period.
Asset Impairments
In the three months ended June 30, 2020 , we incurred $298.3 million of asset
impairments related to long-lived assets in our Energy segment. The majority of
these impairments were due to the write-down of mineral reserves and other
long-lived assets of Energy assets within our West Texas facilities in
connection with the decision to reduce the production capacity of our Kermit ,
Crane , and Seiling facilities, thereby reducing the projected long-term cash
flows and resulting in a determination that the carrying value was not
recoverable.
Restructuring and Other Charges
In the three months endedJune 30, 2020 , we incurred$29.4 million of restructuring charges, which included legal and advisory expenses related to the preparation for our reorganization plan filed under Chapter 11 as well as severance costs related to a reduction in force. In the three months endedJune 30, 2019 , we recorded$9.5 million in restructuring charges, primarily related to separation and relocation costs as a result of Merger integration activities and minimum quantity penalties incurred as a result of utility contracts in connection with reduced production at idled facilities. In the three months endedJune 30, 2019 , we incurred$5.5 million of other charges related to executive severance and benefits. Other Operating Expense, net Other operating expense, net decreased$1.4 million to$0.3 million for the three months endedJune 30, 2020 compared to$1.7 million for the three months endedJune 30, 2019 . The decrease is primarily attributable to$0.5 million gain on disposal of fixed assets and$1.0 million expense related to final working capital adjustments associated with the sale of ourWinchester & Western Railroad , which are included in the three months endedJune 30, 2020 . Loss from Operations Operating loss from continuing operations increased approximately$340.6 million to$350.7 million for the three months endedJune 30, 2020 compared to$10.1 million for the three months endedJune 30, 2019 . The change in operating loss from continuing operations for the three months endedJune 30, 2020 was primarily due to the asset impairments recognized in the period as well as the lower profitability in the Energy segment. 46 --------------------------------------------------------------------------------
Interest Expense, net Interest expense, net increased$31.4 million to$59.3 million for the three months endedJune 30, 2020 compared to$27.9 million for the three months endedJune 30, 2019 . The increase in interest expense is primarily due to the recognition of$35.8 million in interest expense related to our derivative financial instruments no longer being designated as cash flow hedging instruments due to the event of default under the agreements governing our interest rate swaps as a result of the filing of the Chapter 11 Cases. Due to the filing of the Chapter 11 Cases onJune 29, 2020 , the forecasted interest payments which these instruments were intended to hedge against are no longer considered probable. Reorganization items, net In the three months endedJune 30, 2020 , we incurred$24.3 million of reorganization items, net related to Term Loan deferred financing costs that were written off as a result of the Company's Chapter 11 Cases. We did not recognize reorganization items related to professional fees for legal, consulting and advisory services for the three months endedJune 30, 2020 due to the proximity of the bankruptcy filing date with quarter end. We expect to incur significant professional fees related to the bankruptcy during the petition period. Prior to the Chapter 11 filing, we incurred significant professional advisory costs which are recorded in Restructuring and Other Charges. We did not record reorganization items in the three months endedJune 30, 2019 .
Other Non-Operating Expense, net
Other non-operating expense, net increased$1.1 million to$2.7 million in the three months endedJune 30, 2020 compared to$1.6 million in the three months endedJune 30, 2019 . The increase is primarily due to an increase in pension settlement accounting charges in the second quarter of 2020 compared to the second quarter of 2019 due to the level of lump sum retiree distributions made in the current period versus the prior period. Benefit for Income Taxes Benefit for income taxes decreased$3.7 million to$1.4 million for the three months endedJune 30, 2020 compared to a benefit of$5.1 million for the three months endedJune 30, 2019 . Loss before income taxes increased$397.5 million to$437.0 million for the three months endedJune 30, 2020 compared to a loss of$39.5 million for the three months endedJune 30, 2019 . The decrease in benefit from income taxes was primarily attributable to a valuation allowance set up on deferred taxes. The effective tax rate was 0.3% and 13.0% for the three months endedJune 30, 2020 and 2019, respectively. The decrease in the effective tax rate is primarily attributable to a valuation allowance set up on deferred taxes. 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. In response to the economic impact of the COVID-19 pandemic, onMarch 27, 2020 ,President Trump signed into law the Coronavirus Aid, Relief, and Economic Security ("CARES") Act. The CARES Act enacts a number of economic relief measures, including the infusion of various tax cash benefits into negatively affected companies to ease the impact of the pandemic. We are still assessing the impact of CARES Act. The CARES Act included provisions allowing net operating losses arising in tax years beginning afterDecember 31, 2017 , and beforeJanuary 1, 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 endingMarch 31, 2020 , we recorded a discrete benefit of$29.3 million resulting from this change because these losses now eligible for utilization were estimated as not realizable prior to the CARES Act. No tax benefit was recorded for the period endingJune 30, 2020 .
Net Loss Attributable to
Net loss attributable toCovia increased$401.2 million to$435.6 million for the three months endedJune 30, 2020 compared to a loss of$34.4 million for the three months endedJune 30, 2019 primarily due to the asset impairments, lower profitability in the Energy segment and expenses related to the Chapter 11 Cases incurred in the three months endedJune 30, 2020 discussed above. 47 --------------------------------------------------------------------------------
Adjusted EBITDA Adjusted EBITDA decreased$58.6 million to$6.7 million for the three months endedJune 30, 2020 compared to$65.3 million for the three months endedJune 30, 2019 . Adjusted EBITDA for the three months endedJune 30, 2020 excludes the impact of$0.2 million of non-cash stock compensation expense,$298.3 million in asset impairments,$29.4 million in restructuring and other charges, and$24.3 million in reorganization items, net. The change in Adjusted EBITDA is largely due to the profitability, SG&A and other factors discussed above.
Six Months Ended
Revenues Revenues were$542.2 million for the six months endedJune 30, 2020 compared to revenues of$873.2 million for the six months endedJune 30, 2019 , a decrease of$331.0 million , or 38%. Volumes were 11.0 million tons for the six months endedJune 30, 2020 compared to total volumes of 16.2 million tons for the six months endedJune 30, 2019 , a decrease of 5.2 million tons, or 32%. Our revenues decreased largely due to pricing and volumes declines in the Energy business, which resulted from the reduction of E&P activities inNorth America , coupled with the broad impacts of the interruptions caused by the COVID-19 pandemic. Revenues in the Energy segment were$221.0 million for the six months endedJune 30, 2020 compared to$487.6 million for the six months endedJune 30, 2019 . Volumes sold into the Energy segment were 4.8 million tons in the six months endedJune 30, 2020 compared to 9.0 million tons in the six months endedJune 30, 2019 , a decrease of 4.2 million tons, or 47%. Aside from the disruptions experienced at the macro- and industry-specific levels, and the resulting price and volume impacts, revenues also decreased due to reduced production capacity and total production at certain of our plants since the second quarter of 2019, which were concentrated on the Northern White production facilities. Revenues in the Industrial segment were$321.2 million for the six months endedJune 30, 2020 compared to$385.6 million for the six months endedJune 30, 2019 , a decrease of$64.4 million , or 17%. Volumes sold into the Industrial segment were 6.2 million tons in the six months endedJune 30, 2020 , compared to 7.2 million tons for the six months endedJune 30, 2019 , a decrease of 1.0 million tons, or 14%.Total Industrial revenue decreases are primarily attributable to lower transportation-related revenues, for the six months endedJune 30, 2020 . Transportation-related revenues occurred on a greater proportion of Industrial segment shipments in the six months endedJune 30, 2019 when compared to the six months endedJune 30, 2020 . Revenues also decreased when compared to the prior six-month period based on product mix shift and lower volumes due to reduced demand resulting from the disruption caused by the COVID-19 pandemic across the end-markets we serve through our Industrial segment.
Segment Gross Profit and Segment Contribution Margin
Segment gross profit was$107.1 million for the six months endedJune 30, 2020 compared to segment gross profit of$165.6 million for the six months endedJune 30, 2019 , a decrease of$58.5 million , or 35%. The segment gross profit decrease was primarily due to lower volumes as a result of the proppant market downturn which caused downward pricing pressure, lower volumes and a reduction in profitability. Additionally, the Covid-19 pandemic caused reductions in demand across industrial end markets in 2020. Partially offsetting these impacts were reductions in terminal operating costs and railcar lease expense in the current year. Due to the impairment charge recognized in the fourth quarter of 2019, which significantly reduced our "operating right-of-use assets" recorded on our Condensed Consolidated Balance Sheets, we are recognizing less lease expense, largely related to railcars, in the current period versus the prior year comparable period. Segment contribution margin was$127.7 million in the six months endedJune 30, 2020 and further excludes$9.4 million of operating costs of idled facilities and$11.2 million of excess railcar capacity costs. Segment contribution margin was$179.7 million in the six months endedJune 30, 2019 and further excludes$2.0 million of operating costs of idled facilities and$12.0 million of excess railcar capacity costs. These excluded costs are entirely attributable to the Energy segment. Energy segment gross profit was$4.3 million for the six months endedJune 30, 2020 compared to$48.9 million for the six months endedJune 30, 2019 , a decrease of$44.6 million , or 91%. The Energy segment gross profit decrease was primarily due to lower volumes, downward pricing pressure and related reduction in profitability as a result of the proppant market declines. 48 -------------------------------------------------------------------------------- Industrial segment gross profit was$102.8 million for the six months endedJune 30, 2020 compared to$116.7 million for the six months endedJune 30, 2019 , a decrease of$13.9 million , or 12%. Volume declines in the second quarter of 2020 were a result of declining volumes and revenues driven by the Covid-19 pandemic which impacted the end markets the Company serves. For the six months endedJune 30, 2019 , the Industrial segment gross profit included$0.6 million of expense related to the write-up of legacyFairmount Santrol's inventories to fair value as a result of the Merger under GAAP.
Selling, General and Administrative Expenses
SG&A decreased$17.4 million , or 22%, to$63.2 million for the six months endedJune 30, 2020 compared to$80.6 million for the six months endedJune 30, 2019 . SG&A for the six months endedJune 30, 2020 includes stock compensation expense of$1.8 million . The decrease in stock compensation for the six months endedJune 30, 2020 compared to the six months endedJune 30, 2019 was primarily due to the decrease in awards granted in 2020. SG&A for the six months endedJune 30, 2019 included$6.1 million of stock compensation. The remainder of the decrease is primarily due to expense reduction initiatives and headcount rationalization.
Depreciation, Depletion and Amortization
Depreciation, depletion and amortization decreased$51.3 million , or 44%, to$66.0 million for the six months endedJune 30, 2020 , compared to$117.3 million in the six months endedJune 30, 2019 . Depreciation of property, plant, and equipment and amortization expense decreased in the first half of 2020 compared to the first half of 2019 due to a lower depreciable base of existing property, plant, and equipment. In the fourth quarter of 2019, an impairment charge of approximately$1.4 billion , primarily related to the long-lived assets of our Energy segment, was the driver of the lower depreciation in the current period. Asset Impairments We recorded impairment charges of$298.3 million related to property, plant and equipment in ourSeiling Oklahoma and ourWest Texas asset group for the six months endedJune 30, 2020 , due to lower anticipated sales in the future at our local sand facilities. We did not incur asset impairments for the six months endedJune 30, 2019 .
Restructuring and Other Charges
We incurred restructuring and other charges of$34.9 million in the six months endedJune 30, 2020 , primarily related to separation costs and professional fees incurred in preparation of our petition related to our Chapter 11 Cases, as well as ramp down costs at idled facilities. We incurred restructuring and other charges of$11.5 million in the six months endedJune 30, 2019 primarily related to executive severance and benefits charges, as well as costs associated with idling of facilities in the first half of 2019. Other Operating Income, net Other operating income, net decreased$2.8 million to$1.9 million for the six months endedJune 30, 2020 compared to$4.7 million in the six months endedJune 30, 2019 . Other operating income, net for the six months endedJune 30, 2019 included the income related to realization of customary take-or-pay provisions of certain customer supply agreements. Additionally, for the six months endedJune 30, 2019 , we recorded$1.9 million on loss on disposal of fixed assets and income related to easements granted for consideration on certain of our properties inMexico andVirginia . Loss from Operations Operating loss from continuing operations increased$314.3 million to a loss of$353.4 million for the six months endedJune 30, 2020 compared to operating loss of$39.1 million for the six months endedJune 30, 2019 . The change in operating loss from continuing operations for the six months endedJune 30, 2020 was largely due to the asset impairments recognized in the period, lower profitability in the Energy segment and restructuring and other charges of$34.9 million , offset by other operating income as noted above. 49 --------------------------------------------------------------------------------
Interest Expense, net Interest expense, net increased$29.9 million to$82.9 million for the six months endedJune 30, 2020 compared to$53.0 million for the six months endedJune 30, 2019 . The increase in interest expense is due to the loss recognized on long-term interest rate swaps that were de-designated as cash flow hedges for accounting purposes in the second quarter of 2020, as a result of the event of default under the agreements governing our interest rate swaps in connection with the filing of the Chapter 11 Cases, resulting in deferred losses being immediately recognized as interest expense. Due to the filing of the Chapter 11 Cases onJune 29, 2020 , the forecasted interest payments which these instruments were intended to hedge against are no longer considered probable. This was offset slightly by a reduction in the principal on the Term Loan balance in the fourth quarter of 2019 as a result of the voluntary repurchase of approximately$63.0 million of outstanding debt and normal scheduled amortization payments, as well as the decrease in interest rates in the first half of 2020 compared to the first half of 2019. The interest rate was 5.4% and 6.3% for the six months endedJune 30, 2020 and six months endedJune 30, 2019 , respectively. Reorganization items, net In the six months endedJune 30, 2020 , we incurred$24.3 million of reorganization items, net related to Term Loan deferred financing costs that were expensed as a result of the Company's Chapter 11 Cases. We did not recognize reorganization items related to professional fees for legal, consulting and advisory services for the six months endedJune 30, 2020 due to the proximity of the bankruptcy filing date with quarter end. We expect to incur significant professional fees related to the bankruptcy during the petition period. We did not record reorganization items, net in the six months endedJune 30, 2019 .
Other Non-Operating Expense, net
Other non-operating expense, net increased$1.8 million to$5.6 million in the six months endedJune 30, 2020 compared to$3.8 million in the six months endedJune 30, 2019 . The increase is due to the acceleration of previously deferred pension-related expenses as a result of settlement accounting application in the first half of 2020 as distributions exceeded the current period service and interest cost recognized. Benefit for Income Taxes Benefit for income taxes increased$20.5 million to a benefit of$29.7 million for the six months endedJune 30, 2020 compared to benefit of$9.2 million for the six months endedJune 30, 2019 . Loss before income taxes increased$370.5 million to a loss of$466.3 million for the six months endedJune 30, 2020 compared to a loss of$95.8 million for the six months endedJune 30, 2019 . The increase in tax benefit is primarily attributable to a discrete benefit resulting from provisions of the CARES Act allowing for increased carryback and utilization of net operating losses.
The effective tax rate was 6.4% and 9.6% for six months ended
Net Loss Attributable to
Net loss attributable toCovia increased$350.0 million , or 404%, to a loss of$436.6 million for the six months endedJune 30, 2020 , compared to a loss of$86.6 million for the six months endedJune 30, 2019 . The change in net income attributable toCovia is primarily due to decreases in revenues and gross profit and increases in SG&A, asset impairments and restructuring and other charges discussed above. Adjusted EBITDA Adjusted EBITDA decreased$56.7 million to$43.1 million for the six months endedJune 30, 2020 compared to$99.8 million for the six months endedJune 30, 2019 . Adjusted EBITDA for the six months endedJune 30, 2020 excludes the impact of$1.8 million of non-cash stock compensation expense,$34.9 million in restructuring and other related charges,$24.3 in reorganization items, net related to the non-cash effects of the Chapter 11 Cases, and$298.3 million related to impairment charges incurred associated with the idling of our facility inKermit, Texas . The change in Adjusted EBITDA is largely due to the revenues, gross profit, and SG&A factors discussed above. 50 --------------------------------------------------------------------------------
Liquidity and Capital Resources
Overview In general, 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 (including the impacts of the COVID-19 pandemic), industry, and other company-specific factors, we have taken significant actions to reduce our working capital requirements and our overhead costs, monetize certain non-core assets within our portfolio and maintain adequate liquidity. Historically, we have met our liquidity and capital investment needs with funds generated from operations and the issuance of debt, if necessary. Due to our current leverage profile, the maturity of our long-term debt, unfavorable long-term contracts and outlook of the key markets in which we operate, we executed the Restructuring Support Agreement with certain creditors and voluntarily filed the Chapter 11 Cases onJune 29, 2020 in order to accelerate our strategic transformation and facilitate a financial restructuring. Our principal sources of liquidity are cash on-hand and cash flow from operations, both now and in the near future. We have not secured any financing under debtor-in-possession financing and currently anticipate our liquidity needs will be satisfied during the Chapter 11 Cases by cash on-hand and expected cash flow from operations during the period. Our operations are capital intensive and short-term capital expenditures related to certain strategic projects can be substantial. Term Loan 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, subject to a minimum LIBOR floor of 1%. The spread will vary depending on our total net leverage ratio, defined as the ratio of debt (less up to$150 million of cash) to EBITDA for the most recent four fiscal quarter period, as follows: Term Loan Applicable Margin for Applicable Margin for Leverage Ratio Eurodollar Loans ABR 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 for the six months ended
Guarantor Non-Guarantor Total
Revenues $ 443,137 $ 99,056 $ 542,193
Gross profit 58,142 48,943 107,085
EBITDA (345,851 ) 28,591 (317,260 )
Adjustments 360,322 - 360,322
Adjusted EBITDA $ 14,471 $ 28,591 $ 43,062
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 5 in the consolidated financial statements included in this Report for further detail regarding the Term Loan.
As ofJune 30, 2020 , we had outstanding Term Loan borrowings of$1.56 billion and cash on-hand of$250.3 million . These outstanding balances, as well as the accrued interest thereon, have been classified as Liabilities Subject to Compromise in the accompanying Condensed Consolidated Balance Sheets. 51 --------------------------------------------------------------------------------
Receivables Facility
OnMarch 31, 2020 , we entered into a Receivables Financing Agreement ("RFA") by and among (i)Covia , as initial servicer, (ii)Covia Financing LLC , a wholly-owned subsidiary ofCovia , as borrower ("Covia Financing"), (iii) the persons from time to time party thereto, as lenders, (iv)PNC Bank, National Association , as LC bank and as administrative agent ("PNC"), and (v) PNC Capital Markets LLC, as structuring agent ("Structuring Agent"). In connection with the RFA, onMarch 31, 2020 ,Covia , as originator and servicer, and Covia Financing, as the buyer, entered into a Purchase and Sale Agreement ("PSA"), and various ofCovia's subsidiaries, as sub-originators ("Sub-Originators"), andCovia , as the buyer and servicer, entered into the Sub-Originator Purchase and Sale Agreement ("Sub-PSA"). Together, the RFA, the PSA, and the Sub-PSA ("Agreements") established the primary terms and conditions of an accounts receivable securitization program (the "Receivables Facility"). Pursuant to the terms of the Sub-PSA, the Sub-Originators sold its receivables toCovia in a true sale conveyance. Pursuant to the PSA,Covia , in its capacity as originator, sold in a true sale conveyance its receivables, including the receivables it purchased from the Sub-Originators, to Covia Financing. Under the Receivables Facility, Covia Financing could borrow or obtain letters of credit in an amount not to exceed$75 million in the aggregate and would secure its obligations with a pledge of undivided interests in such receivables, together with related security and interests in the proceeds thereof, to PNC. The loans under the Receivables Facility were an obligation of Covia Financing and not the Sub-Originators orCovia . None of the Sub-Originators norCovia guaranteed the collectability of the trade receivables or the creditworthiness of the obligors of the receivables. Amounts outstanding under the Receivables Facility accrue interest based on LIBOR Market Index Rate, provided that Covia Financing could select adjusted LIBOR for a tranche period. The Receivables Facility was scheduled to terminate onMarch 31, 2023 , unless terminated earlier pursuant to the terms of the Agreements. OnJuly 1, 2020 , as part of the Plan (as defined below) and with the approval of theBankruptcy Court (as defined below), the Company terminated the Receivables Facility. The Agreements included customary fees, conditions, representations and warranties, indemnification provisions, covenants and events of default. The amount available with respect to the receivables was subject to customary limits and reserves, including limits and reserves based on customer concentrations and prior past due balances. Subject in some cases to cure periods, amounts outstanding under the Receivables Facility could be accelerated for typical defaults including, but not limited to, the failure to make when due payments or deposits, borrowing base deficiencies, failure to observe or perform any covenant, failure to pay a material judgment, inaccuracy of representations and warranties, certain bankruptcy or ERISA events, a change of control, the occurrence of a termination event if certain limits are exceeded for a specified period, for certain defaults or acceleration under material debt, or invalidity of security interests or unenforceable transaction documents.
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.
OnJuly 1, 2020 , as part of the Plan and with the approval of theBankruptcy Court , the Company terminated the Receivables Facility, including the Receivables Financing Agreement (the "RFA") by and among (i) the Company, as initial servicer, (ii)Covia Financing LLC , a special purpose entity and wholly owned subsidiary of the Company, as borrower ("Covia Financing"), (iii) the persons from time to time party thereto, as lenders, (iv)PNC Bank, National Association , as LC bank and as administrative agent ("PNC"), and (v) PNC Capital Markets LLC, as structuring agent ("PNC Capital "). In connection with the RFA, (i) the Company, as originator and servicer, and Covia Financing, as the buyer, had entered into a Purchase and Sale Agreement ("PSA"), and (ii) various of the Company's subsidiaries, as sub-originators ("Sub-Originators"), and the Company, as the buyer and servicer, entered into the Sub-Originator Purchase and Sale Agreement ("Sub-PSA"). Together, the RFA, the PSA, and the Sub-PSA established the primary terms and conditions of an accounts receivable securitization program (the "Receivables Facility"). In connection with the termination of the Receivables Facility, the Company repaid all of the outstanding obligations in respect of principal, interest and fees under the Receivables Facility and terminated and released all security interests and liens in the assigned receivables granted in connection therewith. Further, with the approval of theBankruptcy Court , the Receivables Facility was replaced with a letter of credit facility pursuant to an interim order of theBankruptcy Court authorizing, among other things, (i) the Company's funding of a new letter of credit collateral account held at Covia Financing, (ii) entry into the Payoff and Reassignment Agreement (the "Payoff Agreement"), among the Company, Covia Financing, the Sub-Originators, PNC, andPNC Capital , (iii) the Company's, Covia Financing's and the Sub-Originators' entry into, and performance of, their respective obligations under the Payoff Agreement and, as applicable, the Reimbursement Agreement for Cash-Collateralized Standby Letters of Credit, among PNC, Covia Financing, and the Company (the "Reimbursement Agreement" and, together with the Payoff Agreement, the "Letter of Credit Agreements"), and (iv) execution of the transactions contemplated by the Letter of Credit Agreements.
In
52
--------------------------------------------------------------------------------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.Covia's working capital was$235.2 million atJune 30, 2020 and$61.7 million atDecember 31, 2019 . The increase in working capital is primarily due to the reclassification of substantially all of the pre-petition current liabilities to Liabilities Subject to Compromise insofar as they relate to obligations of the Company Parties. Our working capital requirements remain consistent with the pre-petition requirements, however, these pre-petition liabilities subject to compromise may be settled for amounts substantially different from those in the accompanying condensed consolidated balance sheets. Excluding this classification change, our working capital would have been$42.0 million . The change in pro forma working capital compared toDecember 31, 2019 was due to$34.6 million of our cash flow hedging instruments becoming currently payable. The reclassification to current was made due to the event of default as a result of the Chapter 11 Cases. During the quarter endedJune 30, 2020 , various working capital metrics improved, particularly cash collections and days sales outstanding ratios. 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, non-cash losses on derivatives, non-cash reorganization items and the effect of changes in working capital. Net cash used in operating activities was$40.1 million for the six months endedJune 30, 2020 , compared with$51.4 million of cash provided by operating activities for the six months endedJune 30, 2019 . This$91.5 million variance was primarily due to lower profitability in the current period. The lower volumes in the six months endedJune 30, 2020 resulted in lower working capital requirements to fund accounts receivable and inventories. Improvements in collections also resulted in additional reductions in receivables compared to the six months endedJune 30, 2019 . Further, in the second quarter of 2019, the Company implemented a new ERP system which resulted in longer average collection times during the second quarter 2019 on the Company's trade receivables.
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. As a result of current market conditions, the Company has refocused its capital investment strategy primarily toward maintenance capital and investments in projects to maintain health and safety standards. Net cash used in investing activities was$16.5 million for the six months endedJune 30, 2020 , compared to$62.6 million used for the six months endedJune 30, 2019 . The$46.1 million variance was primarily due to reduced growth-related capital expenditures within the Energy segment to align with current market conditions. Capital expenditures were$17.5 million in the six months endedJune 30, 2020 and were primarily focused on maintenance expenditures at various facilities as well as investments in the Company's nepheline syenite operations. Capital expenditures were$59.5 million in the six months endedJune 30, 2019 and were primarily focused on completing ourWest Texas andSeiling facilities, completion of expansion projects at ourIllinois andOregon facilities, and expanding capacity at our Canoitas,Mexico facility. Subject to our continuing evaluation of market conditions, we anticipate that our capital expenditures in 2020 will be approximately$45 million , which will be primarily associated with maintenance and cost improvement capital projects, and near-term payback growth projects. We expect to fund our capital expenditures through cash on our balance sheet and cash generated from our operations. 53
--------------------------------------------------------------------------------
Net cash used in financing activities was$9.9 million in the six months endedJune 30, 2020 compared to$11.0 million used in the six months endedJune 30, 2019 . The slight decrease is primarily due to decreased principal repayments of our Term Loan in the six months endedJune 30, 2020 versus the prior period. This decrease was driven by the repurchase of approximately$63 million of the outstanding Term Loan in December of 2019, which lowered the overall amortization payment requirements.
Liquidity After Filing the Chapter 11 Cases
During the pendency of the Chapter 11 Cases, the Company's principal sources of liquidity are expected to be limited to cash flow from operations and cash on hand. Our ability to maintain adequate liquidity through the reorganization process and beyond depends on successful operation of our business, and appropriate management of operating expenses and capital spending. Our anticipated liquidity needs are highly sensitive to changes in each of these and other factors. The Consolidated Financial Statements included in this Report have been prepared on a going concern basis of accounting, which contemplates continuity of operations, realization of assets, and satisfaction of liabilities and commitments in the normal course of business. The Consolidated Financial Statements do not reflect any adjustments that might result from the outcome of the Chapter 11 Cases. We have reclassified all of the Company Parties indebtedness to "Liabilities Subject to Compromise" atJune 30, 2020 . Our level of indebtedness has adversely impacted and is continuing to adversely impact our financial condition. As a result of our financial condition, the defaults under, and the resulting acceleration of, substantially all of our outstanding indebtedness, and the risks and uncertainties surrounding the Chapter 11 Cases, substantial doubt exists that we will be able to continue as a going concern. For further discussion, see Note 1 to our condensed consolidated financial statements and those risk factors discussed under "Risk Factors" in Part II, Item 1A of this Report. In anticipation of the Chapter 11 Cases, we did not make our quarterly principal payment of$4.0 million on the Term Loan, which was due after the Petition Date. In addition, following the Chapter 11 Cases, all interest payments due on debt held by the Company Parties were stayed and are included in liabilities subject to compromise on the Company's Condensed Consolidated Balance Sheet as ofJune 30, 2020 . Additionally, a significant portion of our accounts payable and accrued expenses on the balance sheet of the Company Parties represent pre-petition claims which may not be paid in full. Sources of Capital
As of
June 30, 2020 December 31, 2019
(in thousands)
Term Loan $ - $ 1,566,440
Finance lease liabilities 1,503 6,875
Industrial Revenue Bond - 10,000
Other borrowings - 145
Term Loan deferred financing costs, net1 - (25,754)
Liabilities subject to compromise2 1,572,073
-
Total Debt 1,573,576
1,557,706
Less: Cash and cash equivalents 250,261 319,484 Net Debt$ 1,323,315 $ 1,238,222
(1) As a result of the Company's Chapter 11 Cases, the Company expensed
million of Term Loan deferred financing costs, net, recorded in
Reorganization items, net in the Condensed Consolidated Statements of Loss
for the three months ended
(2) In connection with our Chapter 11 Cases, the
the Term Loan, the
Bond,
outstanding on Other borrowings have been reclassified to Liabilities
subject to compromise in our Condensed Consolidated Balance Sheets as of
expense in relation to Term Loan reclassified as Liabilities subject to
compromise.
54
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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 (including the Term Loan, the Industrial Revenue Bond and the Receivables Facility) 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 ofJune 30, 2020 andDecember 31, 2019 , we had$54.0 million and$46.5 million , respectively, accrued for Asset Retirement Obligations, which include future reclamation costs. There were no significant changes with respect to environmental liabilities or future reclamation costs, however, the timing of the settlement estimate has been revised based on decisions made to idle certain production facilities. This has resulted in an increase to the asset retirement obligation recognized in the financial statements as it is computed on a discounted cash flow model.
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.
Recent Accounting Pronouncements
Refer to Note 1 of our unaudited condensed consolidated financial statements included in this Report.
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