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"), 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 influenced by,
and will continue to be influenced by, factors related to the Chapter 11 Cases
(as defined herein), including:
• our ability to obtain confirmation the proposed Joint Chapter 11 Plan of
Reorganization of
"Plan") and successfully consummate the Company Parties' anticipated
restructuring (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
as 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
--------------------------------------------------------------------------------
• 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 our Annual Report on Form 10-K, as filed with the SEC on
March 16, 2020 (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
On
The Chapter 11 Cases are being jointly administered under the caption In re
For more information regarding the impact of the Chapter 11 Cases, see Voluntary
Reorganization under Chapter 11 and 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"), after which Unimin changed its name toCovia Holdings Corporation . 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 Chapter 11 of the Bankruptcy Code ("Chapter 11") 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. 40 -------------------------------------------------------------------------------- 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 the Company entered into after the commencement of the Chapter 11 Cases. In connection with the Chapter 11 Cases, the Company Parties entered into a Restructuring Support Agreement with certain creditors (the "Consenting Stakeholders"), which contemplated agreed-upon terms for a prearranged plan of reorganization. OnJuly 7, 2020 , the Consenting Stakeholders and the Company Parties entered into an Amended and Restated Restructuring Support Agreement (the "Restructuring Support Agreement") to (a) revise the defined term "Required Consenting Stakeholders" to mean those Consenting Stakeholders holding 60.01% instead of 50.01% of the aggregate outstanding principal amount of the term loans under the Term Loan Agreement that are held by the Consenting Stakeholders and (b) provide that theBankruptcy Court must enter, instead of enforce, an order setting the general claims bar date in the Chapter 11 Cases within 60 days of the Petition Date. 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 a prearranged plan of reorganization as filed with theBankruptcy Court . The Restructuring Support Agreement may be terminated by one or more of the Consenting Stakeholders or the Company. 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 Bankruptcy Court may refuse to confirm the Plan. OnSeptember 25, 2020 , the Company Parties filed a proposed Joint Chapter 11 Plan of Reorganization ofCovia Holdings Corporation and Its Debtor Affiliates (the "Plan") and a related Disclosure Statement (the "Disclosure Statement") describing, among other things, the Plan; the Company Parties' anticipated financial restructuring; the events leading to the Chapter 11 Cases; certain events that have occurred or are anticipated to occur during the Chapter 11 Cases, including the anticipated solicitation of votes to approve the Plan from certain of the Company Parties' creditors; projected recoveries with respect to claims against and equity interests in the Company Parties under the Plan; and certain other aspects of the anticipated financial restructuring.
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 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 that is expected to persist 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 has affected our Industrial segment throughout the first nine months 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. It remains unclear how long the effects of the COVID-19 pandemic will negatively impact longer-term demand for our products. 41
-------------------------------------------------------------------------------- Certain areas of our business began to stabilize inJune 2020 and continued to stabilize throughout the third quarter, particularly in our Industrial end market businesses; however, we expect a significant impact to revenue and profitability in 2020 across both segments compared to 2019. In response to these market conditions, the Company has taken several steps to further reduce active capacity and lower operational and overhead costs throughout the Company. These actions include the idling of ourKermit ,Seiling andUtica facilities, de-rating productive capacity at several plants, 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, shifting customer trends, 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. Further, as a result of the COVID-19 pandemic, we may be subject to higher costs including, but not limited to, work stoppages, production curtailments or need for redundant staff due to quarantine. 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. 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 itsCrane facility and idled itsKermit facility. 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 more than 30 million tons of capacity over the last two years, including operations at mines inUtica, Illinois ;Kermit, Texas ;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 charge recognized in the nine months endedSeptember 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. The low price of oil is expected to depress demand for our products for the foreseeable future. 42 --------------------------------------------------------------------------------
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 have historically correlated 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
the performance of 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.
Non-GAAP Financial Measures
Segment contribution margin, EBITDA and 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.
43
--------------------------------------------------------------------------------
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. Further, we expect that significant impacts will result from
the reorganization under the Chapter 11 Cases, including the settlement of
prepetition liabilities for amounts less than the carrying amounts at September
30, 2020 , as well as professional fees including advisory and legal fees as we
complete our reorganization process. 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.
44
--------------------------------------------------------------------------------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 Nine Months Ended
September 30, September 30,
2020 2019 2020 2019
(in thousands) (in thousands)
Reconciliation of EBITDA and
Adjusted EBITDA
Net income (loss) from continuing
operations attributable to Covia $ (205,846 ) $ 53,772 $ (642,409 ) $ (32,867 )
Interest expense, net 1,714 26,894 84,637 79,896
Benefit from income taxes (3,278 ) 22,471 (32,937 ) 13,281
Depreciation, depletion, and
amortization expense 27,730 51,920 93,769 169,219
EBITDA (179,680 ) 155,057 (496,940 ) 229,529
Non-cash stock compensation expense1 148 2,296 1,978 8,378
Asset impairments2 - 7,761 298,299 7,761
Restructuring and other charges3 3,756 3,378 38,669 17,504
Reorganization items, net4 214,340 - 238,656 -
Loss (gain) on sale of subsidiaries5 (67 ) (127,195 ) 897 (127,195 )
Costs and expenses related to the
Merger and integration6 - - - 896
Non-cash charges relating to
operating leases7 - 1,856 - 6,056
Excess railcar costs8 8,502 - 8,502 -
Adjusted EBITDA (non-GAAP) $ 46,999 $ 43,153 $ 90,061 $ 142,929 _____________
(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) The$298.3 million represents expenses associated with the impairment of long-lived assets in the Energy segment for the nine months endedSeptember 30, 2020 . The$7.8 million represents expenses associated with the impairment of our Propel SSP® self-suspending proppant in the Energy segment in the three and nine months endedSeptember 30, 2019 . (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 professional fees associated with the Chapter 11 filing which were incurred prior to the petition date. (4) Represents professional fees related to the Chapter 11 Cases subsequent to the petition date, termination and modification of lease agreements, settlements on liabilities subject to compromise for amounts less than previously estimated and Term Loan deferred financing costs, net that were expensed as a result of the Company's Chapter 11 Cases. (5) Represents gains associated with the sale of theCalera, Alabama lime processing facility ("Calera") and theW&W Railroad for the three and nine months endedSeptember 30, 2019 . (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. (8) Represents the amount of non-cash operating lease expense, storage and freight expense on excess railcars incurred in the three and nine monthsSeptember 30, 2020 and recognized in Cost of goods sold (excluding depreciation, depletion, and amortization shown separately) on the Consolidated Statements of Loss. 45 --------------------------------------------------------------------------------
Results of Operations
Three Months Ended Nine Months Ended
September 30, September 30,
2020 2019 2020 2019
(in thousands) (in thousands)
Operating Data
Energy
Tons sold 1,270 4,177 6,064 13,191
Revenues $ 56,315 $ 223,318 $ 277,300 $ 710,940 Segment gross profit (loss) (2,007 ) 17,662 2,300
66,584
Segment contribution margin
87,507 Industrial Tons sold 3,445 3,583 9,605 10,744 Revenues$ 173,045 $ 185,639 $ 494,253 $ 571,199 Segment gross profit 65,532 59,061 168,310 175,792 Segment contribution margin$ 65,532 $ 59,061 $ 168,310 $ 175,792 Totals Tons sold 4,715 7,760 15,669 23,935 Revenues$ 229,360 $ 408,957 $ 771,553 $ 1,282,139 Segment gross profit 63,525 76,723 170,610 242,376
Segment contribution margin
Three Months Ended
Revenues Revenues were$229.4 million for the three months endedSeptember 30, 2020 compared to$409.0 million for the three months endedSeptember 30, 2019 , a decrease of$179.6 million , or 44%. Volumes were 4.7 million tons for the three months endedSeptember 30, 2020 compared to 7.8 million tons for the three months endedSeptember 30, 2019 , a decrease of 3.1 million tons, or 40%. Our volumes and revenues decreased as a result of declining demand across both segments, primarily attributable to the reduction in oil production and the effects of the COVID-19 pandemic on key end-markets served by our business. Although the Company realized an average product selling price increase of approximately 2% in the third quarter of 2020 compared to the third quarter of 2019, the Company's total average selling price for the third quarter of 2020 declined by approximately 8% compared to the third quarter of 2019 due to declines in freight revenue as well as unfavorable product mix away from higher priced product lines. Revenues in the Energy segment were$56.3 million for the three months endedSeptember 30, 2020 compared to$223.3 million for the three months endedSeptember 30, 2019 , a decrease of$167.0 million , or 75%. The decrease in revenues was driven by lower sales volumes and realized pricing due to weakened market conditions across all major product lines within the Energy segment during the three months endedSeptember 30, 2020 . Volumes sold into the Energy segment were 1.3 million tons in the three months endedSeptember 30, 2020 , compared to 4.2 million tons in the three months endedSeptember 30, 2019 , a decrease of 2.9 million tons, or 69%. Revenues in the Industrial segment were$173.0 million for the three months endedSeptember 30, 2020 compared to$185.6 million for the three months endedSeptember 30, 2019 , a decrease of$12.6 million , or 7%. Volumes sold into the Industrial segment were 3.4 million tons in the three months endedSeptember 30, 2020 , compared to 3.6 million tons for the three months endedSeptember 30, 2019 , a decrease of 0.2 million tons, or 6%. In the third quarter of 2019 we completed the sale of ourCalera facility andW&W Railroad which accounted for$7.3 million of revenue for the three months endedSeptember 30, 2019 . Other than the sale of theCalera facility and theW&W Railroad , the remainder of the decline in revenue and volume decreases during the third quarter of 2020 compared to the third quarter of 2019 were primarily attributed to the COVID-19 pandemic, however market conditions and demand improved throughout the third quarter of 2020. 46
--------------------------------------------------------------------------------
Segment Gross Profit (Loss) and Segment Contribution Margin
Segment gross profit was$63.5 million for the three months endedSeptember 30, 2020 compared to segment gross profit of$76.7 million for the three months endedSeptember 30, 2019 , a decrease of$13.2 million , or 17%. The segment gross profit decrease was primarily due to the decrease in sales volumes and pricing, which were partially offset by a decrease in railcar lease expense for the three months endedSeptember 30, 2020 . Segment contribution margin was$79.7 million in the three months endedSeptember 30, 2020 and excludes$7.7 million of operating costs of idled facilities and$8.5 million of excess railcar costs. Segment contribution margin was$83.6 million in the three months endedSeptember 30, 2019 and excludes$1.0 million of operating costs of idled facilities and$5.9 million of excess railcar capacity costs. These excluded costs are entirely attributable to the Energy segment. We have made significant progress in the third quarter of 2020 in reducing costs associated with reducing our overall railcar fleet via the rejection of a number of above-market leases. We expect the excess railcar amounts to decline in the future as a result of the reorganization process. Our Energy segment had a gross loss of$2.0 million for the three months endedSeptember 30, 2020 compared to a gross profit of$17.7 million for the three months endedSeptember 30, 2019 , a decrease of$19.7 million , or 111%. This decrease in gross profit was primarily due to lower volumes and average selling prices driven by oversupplied oil and gas markets and the ongoing effects of the COVID-19 pandemic. Industrial segment gross profit was$65.5 million for the three months endedSeptember 30, 2020 compared to$59.1 million for the three months endedSeptember 30, 2019 , an increase of$6.4 million , or 11%. Excluding the sale of ourCalera facility andW&W Railroad in the third quarter of 2019, Industrial gross profit was$56.8 million for the three months endedSeptember 30, 2019 or an increase of$8.7 million . The increase in Industrial segment gross profit was primarily due to plant cost improvements, which included reductions in our workforce and controlled variable input costs, which were partially offset by reductions in demand and sales volume caused by the North American business closures due to the COVID-19 pandemic.
Selling, General and Administrative Expenses
Selling, general and administrative expenses ("SG&A") decreased $7.5 million , or
21%, to $28.1 million for the three months ended September 30, 2020 compared to
$35.6 million for the three months ended September 30, 2019 . SG&A for the three
months ended September 30, 2020 included $0.1 million of stock compensation
expense compared to $2.3 million of stock compensation expense in the three
months ended September 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 and lower travel and professional fees. A
large portion of our external professional services fees have been incurred in
connection with the Chapter 11 bankruptcy proceeding, which is classified as
"Reorganization items, net" that are direct and incremental to the petition
process. Consequently, there has been a reduction in professional services
spending classified within Selling, general and administrative expenses in the
third quarter of 2020 compared to the third quarter of 2019.
Depreciation, Depletion and Amortization
Depreciation, depletion and amortization ("DD&A") decreased $24.2 million , or
47%, to $27.7 million for the three months ended September 30, 2020 , compared to
$51.9 million in the three months ended September 30, 2019 . Depreciation of
property, plant, and equipment and amortization expense decreased during the
third quarter of 2020 compared to the third quarter of 2019 due to a lower
depreciable base of existing property, plant, and equipment as well as the sale
of the Calera 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 third quarter of
2020. Additionally, the impairment charges primarily taken on our regional sand
asset groups in the second quarter of 2020 resulted in a reduction in the
Company's depreciation, depletion and amortization in the third quarter of 2020
versus the third quarter of 2019.
Asset Impairments
In the three months ended September 30, 2020 , we did not record any asset
impairments related to long-lived assets. In the three months ended September
30, 2019 we recorded a $7.8 million charge to adjust the carrying amount of
long-lived assets specific to our Propel SSP® self-suspending proppant within
the Energy segment, to their salvage value.
47
--------------------------------------------------------------------------------Restructuring and Other Charges
In the three months endedSeptember 30, 2020 , we incurred$1.1 million of restructuring charges related to the restructuring of a labor union agreement at one of our facilities. In the three months endedSeptember 30, 2019 , we incurred$3.4 million of strategic-related charges. Gain on Sale of Subsidiaries
In the three months ended
Other Operating Expense (Income), net
Other operating income, net increased$0.9 million to$0.9 million for the three months endedSeptember 30, 2020 primarily attributable to gains on the disposal of miscellaneous fixed assets. Income from Operations Income from continuing operations decreased approximately$97.6 million to$7.6 million for the three months endedSeptember 30, 2020 compared to$105.2 million for the three months endedSeptember 30, 2019 . This change was primarily due to the$127.2 million gain on sale of subsidiaries recognized in the prior period partially offset by the decrease in DD&A of$24.2 million during the three months endedSeptember 30, 2020 . Interest Expense, net Interest expense, net decreased$25.2 million to$1.7 million for the three months endedSeptember 30, 2020 compared to$26.9 million for the three months endedSeptember 30, 2019 . The decrease in interest expense is primarily due to the stay on interest expense on the Term Loan as of the Petition Date pending resolution of the Chapter 11 Cases. Our contractual interest expense that would be reflected if the Chapter 11 Cases were not underway was approximately$32.1 million for the three months endedSeptember 30, 2020 . Reorganization items, net In the three months endedSeptember 30, 2020 , we incurred$214.3 million of Reorganization items, net related primarily to professional fees incurred due to the Chapter 11 Cases, termination and modification of lease agreements. These amounts were partially offset by settlements on liabilities subject to compromise for amounts less than previously estimated. We did not record reorganization items in the nine months endedSeptember 30, 2019 .
Other Non-Operating Expense, net
Other non-operating expense, net decreased$1.2 million to$0.7 million in the three months endedSeptember 30, 2020 compared to$1.9 million in the three months endedSeptember 30, 2019 . The decrease is primarily due to a decrease in pension settlement accounting charges in the third quarter of 2020 compared to the third quarter of 2019. 48
--------------------------------------------------------------------------------
Provision for Income Taxes Provision for income taxes decreased$25.8 million to$3.3 million for the three months endedSeptember 30, 2020 compared to a provision of$22.5 million for the three months endedSeptember 30, 2019 . Profits before income taxes decreased$285.6 million to a loss of$209.2 million for the three months endedSeptember 30, 2020 compared to a profit of$76.4 million for the three months endedSeptember 30, 2019 . The decrease in provision from income taxes is primarily attributable to a decrease in income before taxes. The effective tax rate was 1.6% and 29.4% for the three months endedSeptember 30, 2020 and 2019, respectively. The decrease in the effective tax rate is primarily attributable to a valuation allowance recorded against 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 quarter endingSeptember 30, 2020 . As ofSeptember 30, 2020 we have$33.8 million recorded as a receivable on the Condensed Consolidated Balance Sheets related to the CARES Act.
Net Income (Loss) Attributable to
Net loss attributable toCovia increased$259.6 million to$205.8 million for the three months endedSeptember 30, 2020 compared to net income attributable toCovia of$53.8 million for the three months endedSeptember 30, 2019 primarily due to lower profitability in the Energy segment and expenses related to the Chapter 11 Cases incurred in the three months endedSeptember 30, 2020 discussed above. Adjusted EBITDA Adjusted EBITDA increased$3.8 million to$47.0 million for the three months endedSeptember 30, 2020 compared to$43.2 million for the three months endedSeptember 30, 2019 . Adjusted EBITDA for the three months endedSeptember 30, 2020 excludes the impact of$0.1 million of non-cash stock compensation expense,$0.1 million gain in working capital adjustments on sale of subsidiaries,$3.8 million in restructuring and other charges,$8.5 million of excess railcar costs, and$214.3 million in reorganization items, net. The change in Adjusted EBITDA is largely due to the changes in segment profit margin, SG&A and other factors discussed above.
Nine Months Ended
Revenues Revenues were$771.6 million for the nine months endedSeptember 30, 2020 compared to revenues of$1,282.1 million for the nine months endedSeptember 30, 2019 , a decrease of$510.5 million , or 40%. Total volumes were 15.7 million tons for the nine months endedSeptember 30, 2020 compared to total volumes of 23.9 million tons for the nine months endedSeptember 30, 2019 , a decrease of 8.2 million tons, or 34%. 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 which negatively impacted our Industrial segment. 49
-------------------------------------------------------------------------------- Revenues in the Energy segment were$277.3 million for the nine months endedSeptember 30, 2020 compared to$710.9 million for the nine months endedSeptember 30, 2019 . Volumes sold into the Energy segment were 6.1 million tons in the nine months endedSeptember 30, 2020 compared to 13.2 million tons in the nine months endedSeptember 30, 2019 , a decrease of 7.1 million tons, or 54%. In addition to the disruptions experienced at the macro- and industry-specific levels as a result of the reduction of E&P activities inNorth America and the COVID-19 pandemic, 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$494.3 million for the nine months endedSeptember 30, 2020 compared to$571.2 million for the nine months endedSeptember 30, 2019 , a decrease of$76.9 million , or 13%. Volumes sold into the Industrial segment were 9.6 million tons in the nine months endedSeptember 30, 2020 , compared to 10.7 million tons for the nine months endedSeptember 30, 2019 , a decrease of 1.1 million tons, or 10%. In addition to impacts from the COVID-19 pandemic, total Industrial revenue and volume decreases are primarily attributable to lower transportation-related revenues for the nine months endedSeptember 30, 2020 . Transportation-related revenues represented a greater proportion of Industrial segment shipments in the nine months endedSeptember 30, 2019 compared to the nine months endedSeptember 30, 2020 . Revenues also decreased when compared to the prior nine-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$170.6 million for the nine months endedSeptember 30, 2020 compared to segment gross profit of$242.4 million for the nine months endedSeptember 30, 2019 , a decrease of$71.8 million , or 30%. The segment gross profit decrease was primarily a result of the proppant market downturn in our Energy segment which caused reduced pricing, lower volumes and a reduction in profitability. Additionally, the COVID-19 pandemic caused reductions in demand across the Industrial end markets we serve in 2020. Partially offsetting these impacts were reductions in terminal operating costs and railcar lease expense in the current year. Due to the$1.4 billion 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$207.4 million in the nine months endedSeptember 30, 2020 and further excludes$17.1 million of operating costs of idled facilities and$19.7 million of excess railcar capacity costs. Segment contribution margin was$263.3 million in the nine months endedSeptember 30, 2019 and further excludes$3.0 million of operating costs of idled facilities and$17.9 million of excess railcar capacity costs. These excluded costs are entirely attributable to the Energy segment.
The Energy segment had a gross profit of
Industrial segment gross profit was$168.3 million for the nine months endedSeptember 30, 2020 compared to$175.8 million for the nine months endedSeptember 30, 2019 , a decrease of$7.5 million , or 4% as a result of declining volumes and revenues driven by the COVID-19 pandemic which impacted the end markets the Company serves.
Selling, General and Administrative Expenses
SG&A decreased$24.9 million , or 21%, to$91.3 million for the nine months endedSeptember 30, 2020 compared to$116.2 million for the nine months endedSeptember 30, 2019 . SG&A for the nine months endedSeptember 30, 2020 includes stock compensation expense of$2.0 million compared to$8.4 million for the nine months endedSeptember 30, 2019 . The decrease in stock compensation expense was primarily due to the decrease in awards granted in 2020. The remainder of the decrease is primarily due to a$12.8 million decrease as a result of initiatives to reduce corporate expenses and headcount reductions which have decreased salary and benefit expenses by$9.1 million when compared to the nine months endedSeptember 30, 2019 . 50
--------------------------------------------------------------------------------
Depreciation, Depletion and Amortization
Depreciation, depletion and amortization decreased$75.4 million , or 45%, to$93.8 million for the nine months endedSeptember 30, 2020 , compared to$169.2 million in the nine months endedSeptember 30, 2019 . Depreciation of property, plant, and equipment and amortization expense decreased during this period 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 nine months endedSeptember 30, 2020 . 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 nine months endedSeptember 30, 2020 , due to lower anticipated sales in the future at our local sand facilities. In the nine months endedSeptember 30, 2019 , we recorded$7.8 million of impairment related to the abandonment of our Propel SSP® self-suspending proppant in the third quarter of 2019.
Restructuring and Other Charges
We incurred restructuring and other charges of$36.0 million in the nine months endedSeptember 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$14.9 million in the nine months endedSeptember 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.
Gain on Sale of Subsidiaries
In the nine months ended
Other Operating Income, net
Other operating income, net decreased$0.9 million to$3.8 million for the nine months endedSeptember 30, 2020 compared to$4.7 million in the nine months endedSeptember 30, 2019 . For the nine months endedSeptember 30, 2020 , we recorded a$2.4 million gain on disposal of fixed assets. Other operating income, net for the nine months endedSeptember 30, 2019 included the income related to realization of customary take-or-pay provisions of certain customer supply agreements. Additionally, for the nine months endedSeptember 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 . Income (Loss) from Operations Income from continuing operations decreased$412.0 million to a loss of$345.9 million for the nine months endedSeptember 30, 2020 compared to income of$66.1 million for the nine months endedSeptember 30, 2019 . This change was largely due to asset impairments of$298.3 million recognized in the nine months endedSeptember 30, 2020 compared to$7.8 million in the prior period, a gain on sale of subsidiaries of$127.2 million recognized in the prior period, and restructuring and other charges of$36.0 million , offset by decreases in SG&A and DD&A in the nine months endedSeptember 30, 2020 as noted above. Interest Expense, net Interest expense, net increased$4.7 million to$84.6 million for the nine months endedSeptember 30, 2020 compared to$79.9 million for the nine months endedSeptember 30, 2019 . The increase in interest expense is due to the loss recognized on long-term interest rate swaps that were re-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 increase 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 51 -------------------------------------------------------------------------------- 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% for the six months endedJune 30, 2020 and 8.3% for the three months endedSeptember 30, 2020 , resulting in an interest rate of 6.3% for the nine months endedSeptember 30, 2019 . As of the Petition Date, the interest expense on the Term Loan was stayed pending the resolution of the Chapter 11 Cases. Reorganization items, net In the nine months endedSeptember 30, 2020 , we incurred$238.7 million of reorganization items, net related primarily to professional fees incurred due to the Chapter 11 Cases, Term Loan deferred financing costs that were expenses as a result of the Chapter 11 Cases, and terminations and modifications of lease agreements. These amounts were primarily offset by settlements on liabilities subject to compromise for amounts less than previously estimated. We did not record reorganization items, net in the nine months endedSeptember 30, 2019 .
Other Non-Operating Expense, net
Other non-operating expense, net increased$0.6 million to$6.3 million in the nine months endedSeptember 30, 2020 compared to$5.7 million in the nine months endedSeptember 30, 2019 . The increase is due to the acceleration of previously deferred pension-related expenses as a result of the application of settlement accounting in the first half of 2020 as distributions exceeded the current period service and interest cost recognized. Benefit from Income Taxes Income taxes decreased$46.2 million to a benefit of$32.9 million for the nine months endedSeptember 30, 2020 compared to provision of$13.3 million for the nine months endedSeptember 30, 2019 . Loss before income taxes increased$656.0 million to$675.4 million for the nine months endedSeptember 30, 2020 compared to a loss of$19.4 million for the nine months endedSeptember 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 4.9% and 68.4% for nine months endedSeptember 30, 2020 and 2019, respectively. The decrease in the effective tax rate is primarily attributable to a valuation allowance recorded against deferred taxes offset by a discrete benefit resulting from provisions of the CARES Act allowing for increased carryback and utilization of net operating losses. As ofSeptember 30, 2020 we have$33.8 million recorded as a receivable on the Condensed Consolidated Balance Sheets related to the CARES Act.
Net Loss Attributable to
Net loss attributable toCovia increased$609.5 million , or 1,853%, to a loss of$642.4 million for the nine months endedSeptember 30, 2020 , compared to a loss of$32.9 million for the nine months endedSeptember 30, 2019 . The change in net loss attributable toCovia is primarily due to decreases in revenues and gross profit and increases in SG&A, asset impairments, reorganization items and restructuring and other charges discussed above. Adjusted EBITDA Adjusted EBITDA decreased$52.9 million to$90.1 million for the nine months endedSeptember 30, 2020 compared to$142.9 million for the nine months endedSeptember 30, 2019 . Adjusted EBITDA for the nine months endedSeptember 30, 2020 excludes the impact of$2.0 million of non-cash stock compensation expense,$0.9 million loss in working capital adjustments on sale of subsidiaries,$38.7 million in restructuring and other related charges,$238.7 million in reorganization items, net related to the effects of the Chapter 11 Cases,$8.5 million of excess railcar costs, 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. 52 --------------------------------------------------------------------------------
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 macro-environment (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.
Liquidity After Filing the Chapter 11 Cases
During the duration 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 which we believe is sufficient to fund our operations during our Chapter 11 case. 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 condensed 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 condensed 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" atSeptember 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 ofSeptember 30, 2020 . Additionally, a significant portion of our accounts payable and accrued expenses on the Debtors' Balance Sheet under Note 24 represent pre-petition claims which may not be paid in full. 53 --------------------------------------------------------------------------------
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 varies 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 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 1 and 5 to our in the consolidated financial statements included in this Report for further detail regarding the Term Loan.
As ofSeptember 30, 2020 , we had outstanding Term Loan borrowings of$1.56 billion and cash on-hand of$246.9 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.
Receivables Facility
OnMarch 31, 2020 , we entered into a Receivables Financing Agreement ("RFA") 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 certainCovia 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, each of 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, toCovia Financing. Under the Receivables Facility, Covia Financing could borrow or obtain letters of credit in an amount not to exceed$75.0 million in the aggregate and would secure its obligations under the letters of credit through a pledge of undivided interests in the receivables it purchased fromCovia , 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 accrued 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. 54 -------------------------------------------------------------------------------- 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. 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 obtained the termination and release of all security interests and liens in the assigned receivables granted in connection therewith from PNC. Further, with the approval of theBankruptcy Court , the Receivables Facility was replaced with a letter of credit facility pursuant to a final 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) the 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) the execution of the transactions contemplated by the Letter of Credit Agreements. InJuly 2020 , we cash collateralized approximately$37.0 million of our outstanding standby letters of credit.
Working Capital
Working capital is the amount by which current assets (excluding cash, cash equivalents and restricted cash) exceed current liabilities (excluding current portion of long-term debt) and represents a measure of liquidity.Covia's working capital was$201.2 million atSeptember 30, 2020 and$61.7 million atDecember 31, 2019 . The increase in working capital is primarily due to the reclassification of substantially all of our current liabilities prior to the Petition Date relating to obligations of the Company Parties to Liabilities Subject to Compromise. Although our working capital requirements remain consistent with our requirements before the Petition Date, our liabilities reclassified as Liabilities Subject to Compromise may be settled for amounts substantially different from those in the accompanying condensed consolidated balance sheets. Excluding this classification change and the$334.2 million lease claim accrual, our working capital would have been$77.5 million atSeptember 30, 2020 . The change in pro forma working capital compared toDecember 31, 2019 was due to income tax refunds receivable due to the carryback of our net operating losses under the CARES Act, offset by lower investment in working capital for inventory and accounts receivable, which was driven by lower sales volumes and demand levels. During the quarter endedSeptember 30, 2020 , various working capital metrics improved, particularly cash collections and days sales outstanding ratios. Cash Flow Analysis
Net Cash Provided by Operating Activities
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 provided by operating activities was$4.7 million for the nine months endedSeptember 30, 2020 , compared with$68.8 million of net cash provided by operating activities for the nine months endedSeptember 30, 2019 . This$64.1 million variance was primarily due to lower profitability in the three months endedSeptember 30, 2020 . The lower volumes in the nine months endedSeptember 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 nine months endedSeptember 30, 2019 .
Net Cash Provided by (Used in) Investing Activities
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.
55
--------------------------------------------------------------------------------
Net cash used in investing activities was $24.9 million for the nine months
ended September 30, 2020 , compared with $155.2 million of net cash provided by
investing activities in the nine months ended September 30, 2019 . The $180.1
million variance was primarily due to reduced growth-related capital
expenditures within the Energy segment to align with current market conditions.
Capital expenditures were $28.8 million in the nine months ended September 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 $75.1 million in the nine months ended September 30,
2019 and were primarily focused on growth expenditures at our Canoitas, Mexico
facility and the completion of in-basin sand plants.
Subject to our continuing evaluation of market conditions, we anticipate that
our capital expenditures in 2020 will be approximately $45.0 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.
Net cash used in financing activities was$10.5 million in the nine months endedSeptember 30, 2020 compared to$18.1 million used in financing activities in the nine months endedSeptember 30, 2019 . This decrease is primarily due to decreased principal repayments of our Term Loan in the nine months endedSeptember 30, 2020 versus the prior period. We have not made principal payments in 2020 since April of 2020 due to the Chapter 11 Cases, as discussed below. Sources of Capital
As of
September 30, 2020 December 31, 2019
(in thousands)
Term Loan $ - $ 1,566,440
Finance lease liabilities 1,408 6,875
Industrial Revenue Bond - 10,000
Other borrowings - 145
Term Loan deferred financing costs, - (25,754)
net1
Liabilities subject to compromise2 1,571,545
-
Total Debt 1,572,953
1,557,706
Less: Cash, cash equivalents and 286,492 319,484 restricted cash Net Debt $ 1,286,461 $ 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 nine months ended
(2) In connection with our Chapter 11 Cases, the
the Term Loan, the
Bond,
on Other borrowings have been reclassified to Liabilities subject to
compromise in our Condensed Consolidated Balance Sheets as of
2020. Up to the Petition Date, we continued to accrue interest expense in
relation to Term Loan reclassified as Liabilities subject to compromise.
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.
56
--------------------------------------------------------------------------------
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, the acceleration of substantially all of our debt (including the Term Loan and the Industrial Revenue Bond) and the replacement of our Receivables Facility, 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 ofSeptember 30, 2020 andDecember 31, 2019 , we had$54.7 million and$46.5 million , respectively, recognized 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 condensed consolidated 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.
57
--------------------------------------------------------------------------------
© Edgar Online, source
