Item 1. Financial Statements
CHARAH SOLUTIONS, INC.
Condensed Consolidated Balance Sheets
(dollars in thousands except per share data)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
June 30,
2019
|
|
December 31, 2018
|
|
|
|
|
Assets
|
|
|
|
Current assets:
|
|
|
|
Cash
|
$
|
9,581
|
|
|
$
|
6,900
|
|
Trade accounts receivable
|
47,706
|
|
|
60,742
|
|
Receivable from affiliates
|
828
|
|
|
894
|
|
Costs and estimated earnings in excess of billings
|
90,375
|
|
|
86,710
|
|
Inventory
|
22,306
|
|
|
25,797
|
|
Prepaid expenses and other current assets
|
3,946
|
|
|
5,133
|
|
Total current assets
|
174,742
|
|
|
186,176
|
|
Property and equipment:
|
|
|
|
Plant, machinery and equipment
|
73,482
|
|
|
74,896
|
|
Structural fill site improvements
|
55,760
|
|
|
55,760
|
|
Vehicles
|
19,726
|
|
|
17,407
|
|
Office equipment
|
2,322
|
|
|
1,623
|
|
Buildings and leasehold improvements
|
262
|
|
|
262
|
|
Structural fill sites
|
7,110
|
|
|
7,110
|
|
Construction in progress
|
9,596
|
|
|
3,488
|
|
Total property and equipment
|
168,258
|
|
|
160,546
|
|
Less accumulated depreciation
|
(80,969
|
)
|
|
(71,605
|
)
|
Property and equipment, net
|
87,289
|
|
|
88,941
|
|
Other assets:
|
|
|
|
Trade names, net
|
34,850
|
|
|
34,920
|
|
Customer relationships, net
|
59,951
|
|
|
63,898
|
|
Technology, net
|
1,753
|
|
|
1,853
|
|
Non-compete and other agreements, net
|
108
|
|
|
180
|
|
Other intangible assets, net
|
—
|
|
|
22
|
|
Goodwill
|
74,213
|
|
|
74,213
|
|
Other assets
|
—
|
|
|
891
|
|
Deferred tax asset
|
9,136
|
|
|
2,747
|
|
Equity method investments
|
5,218
|
|
|
5,060
|
|
Total assets
|
$
|
447,260
|
|
|
$
|
458,901
|
|
See accompanying notes to condensed consolidated & combined financial statements.
CHARAH SOLUTIONS, INC.
Condensed Consolidated Balance Sheets
(dollars in thousands except per share data)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
June 30,
2019
|
|
December 31, 2018
|
Liabilities and stockholders’ equity
|
|
|
|
Current liabilities:
|
|
|
|
Accounts payable
|
$
|
29,273
|
|
|
$
|
24,821
|
|
Billings in excess of costs and estimated earnings
|
160
|
|
|
1,352
|
|
Notes payable, current maturities
|
108,722
|
|
|
23,268
|
|
Accrued payroll and bonuses
|
11,588
|
|
|
15,480
|
|
Asset retirement obligation, current portion
|
14,126
|
|
|
14,704
|
|
Purchase option liability
|
7,110
|
|
|
10,017
|
|
Accrued expenses
|
20,628
|
|
|
22,473
|
|
Other liabilities
|
905
|
|
|
—
|
|
Total current liabilities
|
192,512
|
|
|
112,115
|
|
Long-term liabilities:
|
|
|
|
Contingent payments for acquisitions
|
11,349
|
|
|
11,214
|
|
Asset retirement obligation, less current portion
|
6,819
|
|
|
11,361
|
|
Line of credit
|
35,174
|
|
|
19,799
|
|
Notes payable, less current maturities
|
127,837
|
|
|
211,022
|
|
Total liabilities
|
373,691
|
|
|
365,511
|
|
Commitments and contingencies (see Note 11)
|
|
|
|
Stockholders’ equity:
|
|
|
|
Retained (losses) earnings
|
(11,431
|
)
|
|
9,414
|
|
Common Stock, $0.01 par value; 200,000,000 shares authorized; 29,586,165 and 29,082,988 shares issued and outstanding as of June 30, 2019 and December 31, 2018, respectively
|
296
|
|
|
291
|
|
Additional paid-in capital
|
83,681
|
|
|
82,880
|
|
Total stockholders’ equity
|
72,546
|
|
|
92,585
|
|
Non-controlling interest
|
1,023
|
|
|
805
|
|
Total equity
|
73,569
|
|
|
93,390
|
|
Total liabilities and equity
|
$
|
447,260
|
|
|
$
|
458,901
|
|
See accompanying notes to condensed consolidated & combined financial statements.
CHARAH SOLUTIONS, INC.
Condensed Consolidated & Combined Statements of Operations
(dollars in thousands except per share data)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
June 30, 2019
|
|
June 30, 2018
|
|
June 30, 2019
|
|
June 30, 2018
|
Revenue
|
$
|
120,936
|
|
|
$
|
195,723
|
|
|
$
|
284,194
|
|
|
$
|
351,252
|
|
Cost of sales
|
123,001
|
|
|
165,174
|
|
|
270,880
|
|
|
301,605
|
|
Gross (loss) profit
|
(2,065
|
)
|
|
30,549
|
|
|
13,314
|
|
|
49,647
|
|
General and administrative expenses
|
17,400
|
|
|
18,937
|
|
|
31,385
|
|
|
33,319
|
|
Operating (loss) income
|
(19,465
|
)
|
|
11,612
|
|
|
(18,071
|
)
|
|
16,328
|
|
Interest expense, net
|
(4,102
|
)
|
|
(5,543
|
)
|
|
(9,154
|
)
|
|
(9,674
|
)
|
Income from equity method investment
|
663
|
|
|
699
|
|
|
1,217
|
|
|
1,286
|
|
(Loss) income before income taxes
|
(22,904
|
)
|
|
6,768
|
|
|
(26,008
|
)
|
|
7,940
|
|
Income tax provision
|
(5,628
|
)
|
|
2,906
|
|
|
(6,389
|
)
|
|
2,906
|
|
Net (loss) income
|
(17,276
|
)
|
|
3,862
|
|
|
(19,619
|
)
|
|
5,034
|
|
Less income attributable to non-controlling interest
|
750
|
|
|
642
|
|
|
1,226
|
|
|
1,009
|
|
Net (loss) income attributable to Charah Solutions, Inc.
|
$
|
(18,026
|
)
|
|
$
|
3,220
|
|
|
$
|
(20,845
|
)
|
|
$
|
4,025
|
|
|
|
|
|
|
|
|
|
(Loss) earnings per common share:
|
|
|
|
|
|
|
|
Basic
|
$
|
(0.61
|
)
|
|
$
|
0.13
|
|
|
$
|
(0.71
|
)
|
|
$
|
0.17
|
|
Diluted
|
$
|
(0.61
|
)
|
|
$
|
0.13
|
|
|
$
|
(0.71
|
)
|
|
$
|
0.16
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding used in (loss) earnings per common share:
|
|
|
|
|
|
|
|
Basic
|
29,558,752
|
|
|
24,477,829
|
|
|
29,374,295
|
|
|
24,096,186
|
|
Diluted
|
29,558,752
|
|
|
25,347,887
|
|
|
29,374,295
|
|
|
24,942,199
|
|
|
|
|
|
|
|
|
|
Pro forma net (loss) income information (see Note 1):
|
|
|
Net (loss) income attributable to Charah Solutions, Inc. before provision for income taxes
|
$
|
(23,654
|
)
|
|
$
|
6,126
|
|
|
$
|
(27,234
|
)
|
|
$
|
6,931
|
|
Pro forma provision for income taxes
|
(5,628
|
)
|
|
1,517
|
|
|
(6,389
|
)
|
|
1,720
|
|
Pro forma net (loss) income attributable to Charah Solutions, Inc.
|
$
|
(18,026
|
)
|
|
$
|
4,609
|
|
|
$
|
(20,845
|
)
|
|
$
|
5,211
|
|
See accompanying notes to condensed consolidated & combined financial statements.
CHARAH SOLUTIONS, INC.
Condensed Consolidated & Combined Statements of Stockholders’ and Members’ Equity
(dollars in thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended June 30, 2019
|
|
|
Charah Solutions, Inc.
|
|
|
Common Stock (Shares)
|
|
Common Stock (Amount)
|
|
Additional Paid-In Capital
|
|
Retained
Earnings (Losses)
|
|
Total
|
|
Non-Controlling
Interest
|
|
Total
|
Balance, March 31, 2019
|
|
29,554,588
|
|
|
$
|
296
|
|
|
$
|
83,083
|
|
|
$
|
6,595
|
|
|
$
|
89,974
|
|
|
$
|
699
|
|
|
$
|
90,673
|
|
Net (loss) income
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(18,026
|
)
|
|
(18,026
|
)
|
|
750
|
|
|
(17,276
|
)
|
Distributions
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(426
|
)
|
|
(426
|
)
|
Share-based compensation expense
|
|
—
|
|
|
—
|
|
|
799
|
|
|
—
|
|
|
799
|
|
|
—
|
|
|
799
|
|
Shares issued under share-based compensation plans
|
|
31,577
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Shares repurchases
|
|
—
|
|
|
—
|
|
|
(201
|
)
|
|
—
|
|
|
(201
|
)
|
|
—
|
|
|
(201
|
)
|
Balance, June 30, 2019
|
|
29,586,165
|
|
|
$
|
296
|
|
|
$
|
83,681
|
|
|
$
|
(11,431
|
)
|
|
$
|
72,546
|
|
|
$
|
1,023
|
|
|
$
|
73,569
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended June 30, 2018
|
|
|
Charah Solutions, Inc.
|
|
|
Common Stock (Shares)
|
|
Common Stock (Amount)
|
|
Additional Paid-In Capital
|
|
Charah, LLC Members' Interest
|
|
Allied Power Management, LLC Members' Interest
|
|
Retained
Earnings
|
|
Total
|
|
Non-Controlling
Interest
|
|
Total
|
Balance, March 31, 2018
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
19,828
|
|
|
$
|
9,687
|
|
|
$
|
19,121
|
|
|
$
|
48,636
|
|
|
$
|
582
|
|
|
$
|
49,218
|
|
Net income
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3,220
|
|
|
3,220
|
|
|
642
|
|
|
3,862
|
|
Share based compensation expense
|
|
—
|
|
|
—
|
|
|
—
|
|
|
104
|
|
|
—
|
|
|
—
|
|
|
104
|
|
|
—
|
|
|
104
|
|
Distributions
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(686
|
)
|
|
—
|
|
|
—
|
|
|
(686
|
)
|
|
(338
|
)
|
|
(1,024
|
)
|
Conversion from members' interest to common stock
|
|
23,436,398
|
|
|
234
|
|
|
28,699
|
|
|
(19,246
|
)
|
|
(9,687
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Issuance of shares
|
|
5,294,117
|
|
|
53
|
|
|
59,188
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
59,241
|
|
|
—
|
|
|
59,241
|
|
Share based common stock issued
|
|
372,169
|
|
|
4
|
|
|
(4
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Shares repurchased
|
|
(19,696
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Share based compensation expense
|
|
—
|
|
|
—
|
|
|
1,189
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,189
|
|
|
—
|
|
|
1,189
|
|
Deferred offering costs
|
|
—
|
|
|
—
|
|
|
(8,622
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(8,622
|
)
|
|
—
|
|
|
(8,622
|
)
|
Balance, June 30, 2018
|
|
29,082,988
|
|
|
$
|
291
|
|
|
$
|
80,450
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
22,341
|
|
|
$
|
103,082
|
|
|
$
|
886
|
|
|
$
|
103,968
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended June 30, 2019
|
|
|
Charah Solutions, Inc.
|
|
|
Common Stock (Shares)
|
|
Common Stock (Amount)
|
|
Additional Paid-In Capital
|
|
Retained
Earnings (Losses)
|
|
Total
|
|
Non-Controlling
Interest
|
|
Total
|
Balance, December 31, 2018
|
|
29,082,988
|
|
|
$
|
291
|
|
|
$
|
82,880
|
|
|
$
|
9,414
|
|
|
$
|
92,585
|
|
|
$
|
805
|
|
|
$
|
93,390
|
|
Net (loss) income
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(20,845
|
)
|
|
(20,845
|
)
|
|
1,226
|
|
|
(19,619
|
)
|
Distributions
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,008
|
)
|
|
(1,008
|
)
|
Share-based compensation expense
|
|
—
|
|
|
—
|
|
|
1,007
|
|
|
—
|
|
|
1,007
|
|
|
—
|
|
|
1,007
|
|
Shares issued under share-based compensation plans
|
|
531,830
|
|
|
5
|
|
|
(5
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Shares repurchases
|
|
(28,653
|
)
|
|
—
|
|
|
(201
|
)
|
|
—
|
|
|
(201
|
)
|
|
—
|
|
|
(201
|
)
|
Balance, June 30, 2019
|
|
29,586,165
|
|
|
$
|
296
|
|
|
$
|
83,681
|
|
|
$
|
(11,431
|
)
|
|
$
|
72,546
|
|
|
$
|
1,023
|
|
|
$
|
73,569
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended June 30, 2018
|
|
|
Charah Solutions, Inc.
|
|
|
Common Stock (Shares)
|
|
Common Stock (Amount)
|
|
Additional Paid-In Capital
|
|
Charah, LLC Members' Interest
|
|
Allied Power Management, LLC Members' Interest
|
|
Retained
Earnings
|
|
Total
|
|
Non-Controlling
Interest
|
|
Total
|
Balance, December 31, 2017
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
19,718
|
|
|
$
|
9,687
|
|
|
$
|
18,316
|
|
|
$
|
47,721
|
|
|
$
|
598
|
|
|
$
|
48,319
|
|
Net income
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
4,025
|
|
|
4,025
|
|
|
1,009
|
|
|
5,034
|
|
Share based compensation expense
|
|
—
|
|
|
—
|
|
|
—
|
|
|
214
|
|
|
—
|
|
|
—
|
|
|
214
|
|
|
—
|
|
|
214
|
|
Distributions
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(686
|
)
|
|
—
|
|
|
—
|
|
|
(686
|
)
|
|
(721
|
)
|
|
(1,407
|
)
|
Conversion from members' interest to common stock
|
|
23,436,398
|
|
|
234
|
|
|
28,699
|
|
|
(19,246
|
)
|
|
(9,687
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Issuance of shares
|
|
5,294,117
|
|
|
53
|
|
|
59,188
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
59,241
|
|
|
—
|
|
|
59,241
|
|
Share based common stock issued
|
|
372,169
|
|
|
4
|
|
|
(4
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Shares repurchased
|
|
(19,696
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Share based compensation expense
|
|
—
|
|
|
—
|
|
|
1,189
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,189
|
|
|
—
|
|
|
1,189
|
|
Deferred offering costs
|
|
—
|
|
|
—
|
|
|
(8,622
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(8,622
|
)
|
|
—
|
|
|
(8,622
|
)
|
Balance, June 30, 2018
|
|
29,082,988
|
|
|
$
|
291
|
|
|
$
|
80,450
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
22,341
|
|
|
$
|
103,082
|
|
|
$
|
886
|
|
|
$
|
103,968
|
|
See accompanying notes to condensed consolidated & combined financial statements.
CHARAH SOLUTIONS, INC.
Condensed Consolidated & Combined Statements of Cash Flows
(dollars in thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
June 30, 2019
|
|
June 30, 2018
|
Cash flows from operating activities:
|
|
|
|
Net (loss) income
|
$
|
(19,619
|
)
|
|
$
|
5,034
|
|
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
|
|
|
|
Depreciation and amortization
|
11,635
|
|
|
17,135
|
|
Amortization of debt issuance costs
|
342
|
|
|
784
|
|
Deferred income tax provision
|
(6,389
|
)
|
|
1,919
|
|
Loss on sale of assets
|
1,305
|
|
|
582
|
|
Income from equity method investment
|
(1,217
|
)
|
|
(1,286
|
)
|
Distributions received from equity investment
|
1,059
|
|
|
938
|
|
Non-cash share-based compensation
|
1,007
|
|
|
1,403
|
|
Loss (gain) on interest rate swap
|
1,796
|
|
|
(2,228
|
)
|
Interest accreted on contingent earnout liability
|
135
|
|
|
—
|
|
Changes in cash due to changes in:
|
|
|
|
Trade accounts receivable
|
13,036
|
|
|
(5,289
|
)
|
Receivable from affiliates
|
66
|
|
|
(82
|
)
|
Costs and estimated earnings in excess of billings
|
(3,665
|
)
|
|
(22,305
|
)
|
Inventory
|
3,491
|
|
|
(825
|
)
|
Prepaid expenses and other current assets
|
1,187
|
|
|
(2,126
|
)
|
Accounts payable
|
4,452
|
|
|
8,587
|
|
Billings in excess of costs and estimated earnings
|
(1,192
|
)
|
|
(8,783
|
)
|
Accrued payroll and bonuses
|
(3,892
|
)
|
|
1,946
|
|
Asset retirement obligation
|
(5,120
|
)
|
|
14
|
|
Accrued expenses
|
(1,845
|
)
|
|
2,396
|
|
Net cash used in operating activities
|
(3,428
|
)
|
|
(2,186
|
)
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
Proceeds from the sale of equipment
|
1,507
|
|
|
1,102
|
|
Purchases of property and equipment
|
(11,491
|
)
|
|
(8,233
|
)
|
Payments for business acquisitions, net of cash received
|
—
|
|
|
(19,983
|
)
|
Purchase of intangible assets
|
—
|
|
|
(31
|
)
|
Net cash used in investing activities
|
(9,984
|
)
|
|
(27,145
|
)
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
June 30, 2019
|
|
June 30, 2018
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
Net proceeds on line of credit
|
15,375
|
|
|
—
|
|
Proceeds from long-term debt
|
9,994
|
|
|
8,400
|
|
Principal payments on long-term debt
|
(8,067
|
)
|
|
(45,547
|
)
|
Repurchases of shares
|
(201
|
)
|
|
—
|
|
Payments of offering costs
|
—
|
|
|
(8,622
|
)
|
Issuance of common stock
|
—
|
|
|
59,241
|
|
Distributions to non-controlling interest
|
(1,008
|
)
|
|
(721
|
)
|
Distributions to members
|
—
|
|
|
(686
|
)
|
Net cash provided by financing activities
|
16,093
|
|
|
12,065
|
|
Net increase (decrease) in cash
|
2,681
|
|
|
(17,266
|
)
|
Cash, beginning of period
|
6,900
|
|
|
32,264
|
|
Cash, end of period
|
$
|
9,581
|
|
|
$
|
14,998
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
Cash paid during the year for interest
|
$
|
4,889
|
|
|
$
|
11,163
|
|
Cash paid during the year for taxes
|
$
|
—
|
|
|
$
|
—
|
|
Non-cash investing and financing transactions
During the
six
months ended
June 30, 2019
and
2018
, the Company purchased equipment with seller-provided financing of
$0
and
$13,441
, respectively.
See accompanying notes to condensed consolidated & combined financial statements.
CHARAH SOLUTIONS, INC.
Notes to Condensed Consolidated & Combined Financial Statements
(dollars in thousands except per share and unit data)
(Unaudited)
1. Nature of Business and Basis of Presentation
Organization
Charah Solutions, Inc. (together with its subsidiaries, “Charah Solutions,” the “Company,” “we,” “us” or “our”) was formed as a Delaware corporation in January 2018 and did not conduct any material business operations prior to the reorganization transactions described below other than certain activities related to the initial public offering (the “IPO”), which was completed on June 18, 2018. Charah Solutions is a holding company, the sole material assets of which consist of membership interests in Charah Management LLC, a Delaware limited liability company (“Charah Management”), and Allied Power Holdings, LLC, a Delaware limited liability company (“Allied Power Holdings”). Through the Company’s ownership of Charah Management and Allied Power Holdings, the Company owns the outstanding equity interests in Charah, LLC, a Kentucky limited liability company (“Charah”), and Allied Power Management, LLC, a Delaware limited liability company (“Allied”), the subsidiaries through which Charah Solutions operates its businesses. The historical financial data presented herein as of
June 30, 2019
and for the periods after the June 18, 2018 corporate reorganization described below is that of Charah and Allied on a consolidated basis, and is on a combined basis for the periods prior to the June 18, 2018 corporate reorganization.
Corporate Reorganization
On June 18, 2018, pursuant to the terms of the reorganization transactions completed in connection with the IPO, (i) (a) Charah Holdings LP, a Delaware limited partnership (“Charah Holdings”) owned by Bernhard Capital Partners Management, LP and certain related affiliates (“BCP”), contributed all of its interests in Charah Management and Allied Power Holdings to the Company in exchange for
17,514,745
shares of common stock, (b) CEP Holdings, Inc., a Delaware corporation owned by Charles E. Price and certain affiliates, contributed all of its interests in Charah Management and Allied Power Holdings to the Company in exchange for
4,605,465
shares of common stock, (c) Charah Management Holdings LLC, a Delaware limited liability company (“Charah Management Holdings”), contributed all of its interests in Charah Management and Allied Power Holdings to the Company in exchange for
907,113
shares of common stock and (d) Allied Management Holdings, LLC, a Delaware limited liability company (“Allied Management Holdings”), contributed all of its interests in Charah Management and Allied Power Holdings to the Company in exchange for
409,075
shares of common stock; (ii) each of Charah Management Holdings and Allied Management Holdings distributed the shares of common stock received by them pursuant to clause (i) above to their respective members in accordance with the respective terms of their limited liability company agreements; and (iii) Charah Holdings distributed a portion of the shares of common stock it received in clause (i) above to certain direct and indirect blocker entities which ultimately merged into the Company, with the Company surviving, and affiliates of BCP received shares of common stock as consideration in the mergers.
Description of Business Operations
The Company is a leading provider of mission-critical environmental and maintenance services to the power generation industry, enabling our customers to address challenges related to the remediation of ash ponds and landfills at open and closed power plant sites while continuously operating and providing necessary electric power to communities nationwide. We offer a suite of coal ash management and recycling, environmental remediation and outage maintenance services. The Company also designs and implements solutions for complex environmental projects (such as coal ash pond closures) and facilitates coal ash recycling through byproduct sales and other beneficial use services. The Company has corporate offices in Kentucky, Louisiana and North Carolina, and principally operates in the eastern and mid-central United States.
Under the Jumpstart Our Business Startups Act (the “JOBS Act”), the Company meets the definition of an “emerging growth company,” which allows the Company to have an extended transition period for complying with new or revised financial accounting standards pursuant to Section 107(b) of the JOBS Act. The Company intends to take advantage of all of the reduced reporting requirements and exemptions, including the longer phase-in periods for the adoption of new or revised financial accounting standards under Section 107 of the JOBS Act until the Company is no longer an emerging growth company. Among other things, we are not required to provide an auditor attestation report on the assessment of the internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act of 2002 and our disclosure obligations regarding executive compensation may be reduced. We may take advantage of these provisions until the last day of our fiscal year following the fifth anniversary of the IPO, or December 31, 2023. However, if certain events occur prior to the end of such five-year period, including if we become a “large accelerated filer,” our annual gross revenue exceeds $1.07 billion or we issue more than $1.0 billion of non-convertible debt in any three-year period, we will cease to be an emerging growth company prior to the end of such five-year period.
CHARAH SOLUTIONS, INC.
Notes to Condensed Consolidated & Combined Financial Statements, continued
(dollars in thousands except per share and unit data)
(Unaudited)
Basis for Presentation
The Company’s fiscal year ends December 31. The accompanying unaudited condensed consolidated and combined financial statements include the assets, liabilities, stockholders’ and members’ equity, and results of operations of the Company and its consolidated and combined subsidiaries. Intercompany transactions and balances have been eliminated in consolidation.
The accompanying unaudited condensed consolidated and combined financial statements have been prepared in accordance with rules and regulations of the Securities and Exchange Commission for quarterly reports on Form 10-Q. In the opinion of management, all adjustments considered necessary for a fair presentation have been included, which consist of normal recurring adjustments. Certain information and footnote disclosures normally included in the annual financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted. The accompanying unaudited condensed consolidated and combined financial statements should be read in conjunction with the audited consolidated and combined financial statements and notes thereto included in the Annual Report on Form 10-K for the year ended December 31, 2018.
Unaudited Pro Forma Income Information
The unaudited pro forma income information gives effect to the corporate reorganization that occurred in connection with the closing of the IPO and the resulting legal entity of Charah Solutions, which is incorporated as a “C” Corporation. Prior to the corporate reorganization, the holding companies for Charah and Allied were limited liability companies and generally not subject to income taxes. The pro forma net income, therefore, includes an adjustment for income tax expense as if the holding companies for Charah and Allied had been “C” Corporations for all periods presented at an assumed combined federal, state and local effective income tax rate of
25%
for the periods from January 1, 2018 through June 17, 2018, plus the actual tax expense for the periods after June 18, 2018. These rates approximate the calculated statutory tax rate for each period.
2. Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09,
Revenue from Contracts with Customers (Topic 606)
, requiring an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The core principle of Accounting Standards Codification (“ASC”) Topic 606 is to recognize revenues when a customer obtains control of a good or service, in an amount that reflects the consideration to which an entity is expected to be entitled for those goods or services. Additionally, this ASU requires enhanced qualitative and quantitative disclosures regarding customer contracts. This ASU will replace most existing revenue recognition guidance in GAAP when it becomes effective and permits the use of either a full retrospective transition method or a modified retrospective with cumulative effect transition method.
To assess the impact of this ASU, we utilized internal resources to lead the implementation effort and supplemented them with external resources. The Company’s adoption activities were performed over three phases: (i) assessment, (ii) design and (iii) implementation using a cross-functional team that included accounting, operational and information technology personnel.
Based on our work to date, we believe we have identified all material contract types, revenues and costs that may be impacted by implementing ASC Topic 606. Generally, the Company believes the majority of its contracts will have similar performance obligations under ASC Topic 606 as compared with the units of account previously identified. We have identified certain contracts where the timing of revenue recognition will change under ASC Topic 606. Prior to the adoption of ASC Topic 606, revenue recorded for certain contracts with fluctuating rates per unit matched the amount that was billed to the customer. In accordance with ASC Topic 606, for contracts with fluctuating rates per unit that are not directly related to changes in the Company’s effort to perform under the contract, the Company will recognize revenue based on the stand-alone selling price per unit, calculated as the average rate per unit over the term of those contractual rates. This accounting treatment will at times create a contract asset or liability for the difference between the revenue recognized and the amount billable/billed to the customer.
As a calendar year-end emerging growth company that has elected to take advantage of the extended transition period for
complying with new or revised financial accounting standards, we are required to adopt the new revenue standard for annual periods beginning on January 1, 2019, and for interim periods within annual periods beginning on January 1, 2020. Accordingly, the interim periods within the year ending December 31, 2019 will be reported under the existing revenue standard, ASC Topic 605, while the annual period for the year ending December 31, 2019 will be reported under ASC Topic 606. For the annual period for the year ending December 31, 2019, we will apply the requirements of ASC Topic 606 to all contracts using the modified retrospective with cumulative effect transition method. Accordingly, we will recognize the cumulative effect of initially applying the new revenue standard as an adjustment to the opening balance of retained earnings for the year ending December 31, 2019.
CHARAH SOLUTIONS, INC.
Notes to Condensed Consolidated & Combined Financial Statements, continued
(dollars in thousands except per share and unit data)
(Unaudited)
The comparative information will not be restated and will continue to be reported under the accounting standards in effect for the comparative periods. Based upon our assessment of the impact of the adoption of ASC Topic 606, we estimate a decrease of approximately
$300
to the opening balance of retained earnings as of January 1, 2019, with an associated decrease in the contract asset balance “costs and estimated earnings in excess of billings.”
In February 2016, the FASB issued ASU No. 2016-02,
Leases (Topic 842)
, requiring all leases to be recognized on the balance sheet as a right-of-use asset and a lease liability, unless the lease is a short-term lease (generally a lease with a term of 12 months or less). At the commencement date of the lease, the Company will recognize: (i) a lease liability for the Company’s obligation to make payments under the lease agreement, measured on a discounted basis; and (ii) a right-of-use asset that represents the Company’s right to use, or control the use of, the specified asset for the lease term. This ASU originally required recognition and measurement of leases at the beginning of the earliest period presented using a modified retrospective transition method. In July 2018, the FASB issued ASU No. 2018-11, which provided an additional (and optional) transition method that permits application of this ASU at the adoption date with recognition of a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. In July 2019, the FASB tentatively changed the effective date of this ASU, extending the effective date by one year for non-public business entities and making the ASU effective for the Company for the fiscal year ending December 31, 2021, and interim periods within the fiscal year ending December 31, 2022, with early adoption permitted. The Company has not yet selected a transition method and is currently evaluating the effect that the adoption of this ASU will have on its consolidated financial statements.
In August 2016, the FASB issued ASU No. 2016-15,
Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments
. This ASU addresses specific cash flow issues, including debt prepayment or debt extinguishment costs, contingent consideration payments made after a business combination, and proceeds from the settlement of insurance claims. This ASU is effective for the Company for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. The Company is currently evaluating the effect that the adoption of this ASU will have on its consolidated financial statements.
In November 2016, the FASB issued ASU No. 2016-18,
Statement of Cash Flows (Topic 230)
. This ASU requires that a statement of cash flows explains the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash or restricted cash equivalents. Upon adopting this ASU, amounts generally described as restricted cash or restricted cash equivalents will be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the consolidated statement of cash flows. ASU No. 2016-18 is effective for the Company for interim and annual periods beginning after December 15, 2018. The Company adopted ASU No. 2016-18 effective January 1, 2019, with retrospective application to our consolidated and combined statements of cash flows so that the consolidated and combined statements of cash flows present a reconciliation of the changes in cash and cash equivalents and restricted cash. The adoption of this ASU did not have a material impact to our consolidated financial statements. As a result of this retrospective adoption, the amount of cash and cash equivalents previously presented in the consolidated and combined statements of cash flows increased by
$3,358
to reflect the inclusion of restricted cash in the amount reported for changes in cash, cash equivalents and restricted cash as of beginning and end of the period for the period from January 1, 2017 through January 12, 2017 and as of beginning of the period for the period from January 13, 2017 through December 31, 2017.
In January 2017, the FASB issued ASU No. 2017-04,
Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
. This ASU simplifies the measurement of goodwill impairment by eliminating the requirement that an entity compute the implied fair value of goodwill based on the fair values of its assets and liabilities to measure impairment. Instead, goodwill impairment will be measured as the difference between the fair value of the reporting unit and the carrying value of the reporting unit. This ASU also clarifies the treatment of the income tax effect of tax-deductible goodwill when measuring goodwill impairment loss. The Company will be required to adopt ASU No. 2017-04 for annual and any interim impairment tests for the periods beginning after December 15, 2019. ASU No. 2017-04 must be applied prospectively, with early adoption permitted. The Company is currently evaluating the effect that the adoption of this ASU will have on its consolidated financial statements.
3. Business Combination
On March 30, 2018, Charah Management completed a transaction with SCB Materials International, Inc. and affiliated entities (“SCB”), a previously unrelated third party, pursuant to which Charah Solutions acquired certain assets and liabilities of SCB for a purchase price of
$35,000
, with
$20,000
paid at closing and
$15,000
to be paid over time in conjunction with certain performance metrics. The contract also contained various mechanisms for a working capital true-up. The acquisition was accounted for under the acquisition method of accounting in accordance with ASC Topic 805,
Business Combinations
. The allocation of
CHARAH SOLUTIONS, INC.
Notes to Condensed Consolidated & Combined Financial Statements, continued
(dollars in thousands except per share and unit data)
(Unaudited)
purchase price for the acquisition was finalized as of March 31, 2019 (as summarized below) with the recognized goodwill allocated to the Environmental Solutions segment. The total amount of goodwill deductible for tax purposes is
$2,025
.
In November 2018, the
$15,000
to be paid over time was reduced by
$3,300
. The present value of the future payments using a discount rate of
2.50%
was determined to be
$11,014
. The Company expects the future payments to occur in 2020 and beyond. The allocation of purchase price for the acquisition is as follows:
|
|
|
|
|
Cash acquired
|
$
|
17
|
|
Net working capital, excluding cash
|
21,255
|
|
Property, plant and equipment
|
5,300
|
|
Trade name intangible assets
|
694
|
|
Customer relationship intangible assets
|
742
|
|
Technology
|
1,972
|
|
Non-compete and other agreements
|
289
|
|
Goodwill
|
745
|
|
Total purchase price
|
$
|
31,014
|
|
Revenue and earnings of
$16,573
and
$954
, respectively, from the acquired business were included in the unaudited condensed consolidated and combined statement of operations for the
three and six
months ended
June 30, 2018
.
The following unaudited information presents the pro forma consolidated revenue and net (loss) income for the
three and six
months ended
June 30, 2019
and
2018
as if the acquisition had been included in the consolidated results of operations beginning January 1, 2017.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
June 30, 2019
|
|
June 30, 2018
|
|
June 30, 2019
|
|
June 30, 2018
|
Pro forma revenue
|
$
|
120,936
|
|
|
$
|
195,723
|
|
|
$
|
284,194
|
|
|
$
|
368,075
|
|
Pro forma net (loss) income attributable to Charah Solutions, Inc.
|
(18,026
|
)
|
|
3,381
|
|
|
(20,845
|
)
|
|
4,811
|
|
The above unaudited pro forma results have been calculated by combining the historical results of the Company and the acquired business as if the acquisition had occurred as of the beginning of the fiscal year prior to the acquisition date, and then adjusting the income tax provisions as if they had been calculated based on the consolidated and combined results. The pro forma results include estimates for additional depreciation related to the fair value of property, plant and equipment and intangible asset amortization.
The pro forma results reflect the elimination of
$573
of direct acquisition costs that were incurred in the
six
months ended
June 30, 2018
(since for purposes of the pro forma presentation they have been reflected in 2017 instead of in 2018). For all periods presented, historical depreciation and amortization expense of the acquired business was adjusted to reflect the acquisition date fair value amounts of the related tangible and intangible assets. No other material pro forma adjustments were deemed necessary, either to conform the acquisition to the Company’s accounting policies or for any other situation. The pro forma information is not necessarily indicative of the results that would have been achieved had the transactions occurred on the date indicated or that may be achieved in the future.
4. Equity Method Investments
Charah has an investment in a company that provides ash management and remarketing services to the electric utility industry. Charah accounts for its investment under the equity method of accounting because Charah has significant influence over the financial and operating policies of the company. Charah had a receivable due from the equity method investment of
$130
and
$108
at
June 30, 2019
and
December 31, 2018
, respectively.
CHARAH SOLUTIONS, INC.
Notes to Condensed Consolidated & Combined Financial Statements, continued
(dollars in thousands except per share and unit data)
(Unaudited)
Summarized balance sheet information of our equity method investment entity is as follows:
|
|
|
|
|
|
|
|
|
|
June 30, 2019
|
|
December 31, 2018
|
Current assets
|
$
|
2,834
|
|
|
$
|
2,619
|
|
Noncurrent assets
|
451
|
|
|
508
|
|
Total assets
|
$
|
3,285
|
|
|
$
|
3,127
|
|
Current liabilities
|
449
|
|
|
607
|
|
Equity of Charah
|
5,218
|
|
|
5,060
|
|
Equity of joint venture partner
|
(2,382
|
)
|
|
(2,540
|
)
|
Total liabilities and members’ equity
|
$
|
3,285
|
|
|
$
|
3,127
|
|
Summarized financial performance of our equity method investment entity is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
June 30, 2019
|
|
June 30, 2018
|
|
June 30, 2019
|
|
June 30, 2018
|
Revenues
|
$
|
2,533
|
|
|
$
|
2,664
|
|
|
$
|
4,753
|
|
|
$
|
5,029
|
|
Net income
|
1,325
|
|
|
1,397
|
|
|
2,433
|
|
|
2,572
|
|
Charah Solutions’ share of net income
|
663
|
|
|
699
|
|
|
1,217
|
|
|
1,286
|
|
The following table reflects our proportional ownership activity in our investment account:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
June 30, 2019
|
|
June 30, 2018
|
|
June 30, 2019
|
|
June 30, 2018
|
Opening balance
|
$
|
5,102
|
|
|
$
|
5,342
|
|
|
$
|
5,060
|
|
|
$
|
5,006
|
|
Distributions
|
(547
|
)
|
|
(687
|
)
|
|
(1,059
|
)
|
|
(938
|
)
|
Share of net income
|
663
|
|
|
699
|
|
|
1,217
|
|
|
1,286
|
|
Closing balance
|
$
|
5,218
|
|
|
$
|
5,354
|
|
|
$
|
5,218
|
|
|
$
|
5,354
|
|
CHARAH SOLUTIONS, INC.
Notes to Condensed Consolidated & Combined Financial Statements, continued
(dollars in thousands except per share and unit data)
(Unaudited)
5. Goodwill and Intangible Assets
The Company’s goodwill and intangible assets consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2019
|
|
December 31, 2018
|
|
Gross Carrying Amount
|
|
Accumulated
Amortization
|
|
Gross Carrying Amount
|
|
Accumulated
Amortization
|
Definite-lived intangibles
|
|
|
|
|
|
|
|
Customer relationships
|
$
|
78,942
|
|
|
$
|
(18,991
|
)
|
|
$
|
78,942
|
|
|
$
|
(15,044
|
)
|
Technology
|
2,003
|
|
|
(250
|
)
|
|
2,003
|
|
|
(150
|
)
|
Non-compete and other agreements
|
289
|
|
|
(181
|
)
|
|
289
|
|
|
(109
|
)
|
SCB trade name
|
694
|
|
|
(174
|
)
|
|
694
|
|
|
(104
|
)
|
Rail easement
|
110
|
|
|
(110
|
)
|
|
110
|
|
|
(88
|
)
|
Total
|
$
|
82,038
|
|
|
$
|
(19,706
|
)
|
|
$
|
82,038
|
|
|
$
|
(15,495
|
)
|
|
|
|
|
|
|
|
|
Indefinite-lived intangibles
|
|
|
|
|
|
|
|
Charah trade name
|
$
|
34,330
|
|
|
|
|
$
|
34,330
|
|
|
|
Goodwill
|
74,213
|
|
|
|
|
74,213
|
|
|
|
Total
|
$
|
108,543
|
|
|
|
|
$
|
108,543
|
|
|
|
Definite-Lived Intangible Assets
As of
June 30, 2019
, and
December 31, 2018
, definite-lived intangible assets included customer relationships, technology, non-compete and other agreements, SCB trade name (see Note 3) and a rail easement. These assets are amortized on a straight-line basis over their estimated useful lives as shown in the table below. Amortization expense was
$2,095
and
$2,136
during the
three
months ended
June 30, 2019
and
2018
, respectively, and
$4,211
and
$4,097
during the
six
months ended
June 30, 2019
and
2018
, respectively.
|
|
|
|
Definite-Lived Intangible Asset
|
|
Useful Life
|
Customer relationships
|
|
10 years
|
Technology
|
|
10 years
|
Non-compete and other agreements
|
|
2 years
|
SCB trade name
|
|
5 years
|
Rail easement
|
|
2 years
|
Goodwill and Indefinite-Lived Intangible Assets
Goodwill represents the excess purchase price over the fair value of the net assets acquired in a business combination. Our goodwill included in the unaudited condensed consolidated balance sheets as of
June 30, 2019
and
December 31, 2018
was $
74,213
. Our intangible assets as of
June 30, 2019
and
December 31, 2018
include a trade name valued at $
34,330
that is considered to have an indefinite life.
Goodwill and indefinite-lived intangible assets are not amortized, but instead are tested for impairment annually or more often if events or changes in circumstances indicate that the fair value of the asset may have decreased below its carrying value. We perform our impairment test effective October 1st of each year and evaluate for impairment indicators between annual impairment tests. We determined there were no indicators of impairment at
June 30, 2019
or
June 30, 2018
for the Maintenance and Technical Services reporting unit. As a result of the Company’s decline in revenues and the operating loss recognized for the
six
months ended
June 30, 2019
, the Company performed the first step of the two step analysis for the Environmental Solutions reporting unit during the quarter ended
June 30, 2019
and determined that no impairment of goodwill occurred as a result of this triggering event. The Environmental Solutions reporting unit’s fair value, as calculated, was approximately
5.4%
greater than its book value as of
June 30, 2019
.
CHARAH SOLUTIONS, INC.
Notes to Condensed Consolidated & Combined Financial Statements, continued
(dollars in thousands except per share and unit data)
(Unaudited)
The valuation used to test goodwill for impairment is dependent upon a number of significant estimates and assumptions, including macroeconomic conditions, growth rates, competitive activities, cost containment, margin expansion and the Company's business plans. We believe these estimates and assumptions are reasonable. However, future changes in the judgments, assumptions and estimates that are used in our impairment testing for goodwill, including discount and tax rates or future cash flow projections, could result in significantly different estimates of the fair values. As a result of these factors and the related cushion as of the date of the previous annual impairment test, goodwill for the Environmental Solutions reporting unit is more susceptible to impairment risk.
The most significant assumptions utilized in the determination of the estimated fair value of Environmental Solutions reporting unit are the net sales and earnings growth rates (including residual growth rates) and the discount rate. The residual growth rate represents the expected rate at which the reporting unit is expected to grow beyond the shorter-term business planning period. The residual growth rate utilized in our fair value estimate is consistent with the reporting unit operating plans and approximates expected long-term category market growth rates and inflation. The discount rate, which is consistent with a weighted average cost of capital that is likely to be expected by a market participant, is based upon industry required rates of return, including consideration of both debt and equity components of the capital structure. Our discount rate may be impacted by adverse changes in the macroeconomic environment, volatility in the equity and debt markets or other factors.
While management can and has implemented strategies to address these events, changes in operating plans or adverse changes in the future could reduce the underlying cash flows used to estimate fair values and could result in a decline in fair value that would trigger future impairment charges of the reporting unit's goodwill balance. The table below provides a sensitivity analysis for the Environmental Solutions reporting unit, utilizing reasonably possible changes in the assumptions for the shorter term and residual growth rates and the discount rate, to demonstrate the potential impacts to the estimated fair values. The table below provides, in isolation, the estimated fair value impacts related to (i) a
75
-basis point increase to the discount rate assumption and (ii) a
100
-basis point decrease to our shorter-term revenue and residual growth rates assumptions, both of which would result in impairment charges.
|
|
|
|
|
|
|
|
Approximate Percent Decrease in Estimated Fair Value
|
|
+75 bps Discount Rate
|
|
-100 bps Growth Rate
|
Environmental Solutions reporting unit
|
6.5
|
%
|
|
5.7
|
%
|
6. Credit Agreement
On September 21, 2018, we entered into a credit agreement (the “Credit Facility”) by and among us, the lenders party thereto from time to time and Bank of America, as administrative agent. The Credit Facility includes:
•
a revolving loan not to exceed
$50,000
(the “Revolving Loan”);
•
a term loan of
$205,000
(the “Closing Date Term Loan”); and
|
|
•
|
a commitment to loan up to a further
$25,000
in term loans, which expires in March 2020 (the “Delayed Draw Commitment” and the term loans funded under such Delayed Draw Commitment, the “Delayed Draw Term Loan”, together with the Closing Date Term Loan, the “Term Loan”).
|
All amounts associated with the Revolving Loan and the Term Loan under the Credit Facility mature in September 2023. The interest rates per annum applicable to the loans under the Credit Facility are based on a fluctuating rate of interest measured by reference to, at our election, either (i) the Eurodollar rate, currently the London Inter-bank Offered Rate (“LIBOR”), or (ii) an alternative base rate. Various margins are added to the interest rate based upon our consolidated net leverage ratio. Customary fees are payable in respect of the Credit Facility and include (i) commitment fees (ranging from
0.25%
to
0.35%
, based upon our consolidated net leverage ratio) for unused portions of the Credit Facility and (ii) fees on outstanding letters of credit (ranging from
1.30%
to
2.10%
, based upon our consolidated net leverage ratio). Amounts borrowed under the Credit Facility are secured by essentially all assets of the Company.
The Credit Facility contains various representations and warranties, and restrictive covenants that, among other things and subject to specified exceptions, restrict the ability of us and our restricted subsidiaries to grant liens, incur indebtedness (including guarantees), make investments, engage in mergers and acquisitions, make dispositions of assets, make restricted payments or change the nature of our or their business. The Credit Facility contains financial covenants related to the consolidated net leverage ratio and the fixed charge coverage ratio (of
1.20
to 1.00). As of
June 30, 2019
, we were required to comply with a
CHARAH SOLUTIONS, INC.
Notes to Condensed Consolidated & Combined Financial Statements, continued
(dollars in thousands except per share and unit data)
(Unaudited)
consolidated net leverage ratio of
3.75
to 1.00 through March 30, 2020, decreasing to
3.50
to 1.00 as of March 31, 2020, further decreasing to
3.25
to 1.00 as of March 31, 2021 and finally decreasing to
3.00
to 1.00 as of March 31, 2022 and thereafter.
The Credit Facility also contains certain affirmative covenants, including reporting requirements, such as delivery of financial statements, certificates and notices of certain events, maintaining insurance and providing additional guarantees and collateral in certain circumstances.
The Credit Facility includes customary events of default, including non-payment of principal, interest or fees, violation of covenants, inaccuracy of representations or warranties, cross default to certain other material indebtedness, bankruptcy and insolvency events, invalidity or impairment of guarantees or security interests, material judgments and change of control.
The Revolving Loan provides a principal amount of up to
$50,000
, reduced by outstanding letters of credit (
$11,980
outstanding as of
June 30, 2019
). As of
June 30, 2019
,
$35,174
was outstanding on the Revolving Loan.
But for the amendment described below, as of June 30, 2019, we would not have been in compliance with the requirement to maintain a consolidated net leverage ratio of
3.75
to 1.00. On August 13, 2019, we entered into Amendment No. 2 to Credit Agreement and Waiver (the “Amendment”), pursuant to which, among other things, the required lenders agreed to waive such non-compliance.
In addition, pursuant to the terms of the Amendment, the Credit Facility was amended to revise the required financial covenant ratios such that, after giving effect to the Amendment, we are not required to comply with any financial covenants through March 30, 2020. After March 30, 2020, we will be required to comply with a consolidated net leverage ratio of
6.50
to 1.00 from March 31, 2020 through September 29, 2020, decreasing to
3.00
to 1.00 as of September 30, 2020 and thereafter. After giving effect to the Amendment, we will also be required to comply with a fixed charge coverage ratio of
0.75
to 1.00 as of March 31, 2020,
0.90
to 1.00 as of June 30, 2020 and
1.20
to 1.00 thereafter.
As consideration for the accommodations described above, we have agreed that amounts borrowed pursuant to the Delayed Draw Commitment will not exceed
$15,000
at any one time outstanding (without reducing the overall Delayed Draw Commitment amount). In addition, any Delayed Draw Term Loans shall incur additional interest at a rate equal to
10.0%
per annum on all amounts outstanding in excess of
$10,000
of Delayed Draw Term Loans. Further, the margin of interest that will be charged on all outstanding loans has been increased to
4.00%
for loans based on LIBOR and
3.00%
for loans based on the alternative base rate. The Amendment revised the amount of (i) the commitment fees to
0.35%
at all times for unused portions of the Credit Facility and (ii) fees on outstanding letters of credit to
3.35%
at all times. The Amendment also adds a requirement to make
two
additional scheduled prepayments of outstanding loans under the Credit Facility, including a payment of
$50,000
on or before September 13, 2019 and an additional payment of
$40,000
on or before March 31, 2020.
The Company believes collection of the payment related to the early completion of the Brickhaven deemed termination (see Note 15) is probable before the
$50,000
September 13, 2019 required debt payment, and such proceeds will be used to fund this required prepayment. While management believes it is unlikely, any delay in the receipt of this payment could require the Company to amend or obtain a waiver from the Administrative Agent to remain in compliance with the Amendment to the Credit Agreement. There is no assurance that we could obtain such amendment or waiver.
Regarding the March 2020 debt payment of
$40,000
, management has evaluated its ability to make this payment using our most recent financial forecast. Based on this evaluation, management believes it is probable that the Company will be able to make this payment. Management’s assessment is based upon the anticipated availability under the revolving credit facility, projected cash flows from operations, and prudent working capital management. The financial forecast does not anticipate incurring material unexpected losses in existing operations or new work awards being materially delayed. If these or other unanticipated headwinds in our business occur, the Company could be required to amend or obtain a waiver from the Administrative Agent regarding the
$40,000
payment due in March 2020, and there is no assurance that we could obtain such amendment or waiver.
The Amendment also includes revisions to the restrictive covenants, including removing certain exceptions to the restrictions on our ability to make acquisitions, to make investments and to make dividends or other distributions. After giving effect to the Amendment, we will not be permitted to make any distributions or dividends to our shareholders without the consent of the required lenders.
CHARAH SOLUTIONS, INC.
Notes to Condensed Consolidated & Combined Financial Statements, continued
(dollars in thousands except per share and unit data)
(Unaudited)
7. Notes Payable
The following table summarizes the major components of debt at each balance sheet date and provides maturities and interest rate ranges for each major category as of
June 30, 2019
and
December 31, 2018
:
|
|
|
|
|
|
|
|
|
|
June 30, 2019
|
|
December 31, 2018
|
Various equipment notes entered into in November 2017, payable in monthly installments ranging from $5 to $24, including interest at 5.2%, maturing in December 2022 through December 2023. The notes are secured by equipment with a net book value of $3,931 as of June 30, 2019.
|
$
|
4,450
|
|
|
$
|
4,949
|
|
Various equipment notes entered into in 2018, payable in monthly installments ranging from $1 to $39, including interest ranging from 5.61% to 6.80%, maturing in March 2023 through May 2025. The notes are secured by equipment with a net book value of $10,779 as of June 30, 2019.
|
11,375
|
|
|
12,293
|
|
Various equipment notes entered into in 2019, payable in monthly installments of $3, including interest of 4.7%, maturing in May 2021 through March 2024. The notes are secured by equipment with a net book value of $249 as of June 30, 2019.
|
252
|
|
|
—
|
|
In June 2018, the Company entered into a $12,000 convertible, non-revolving credit note with a bank. The credit note converted to a term loan on April 10, 2019, with a maturity date of April 10, 2024. Interest on borrowings subsequent to the conversion date is calculated at a fixed rate per annum equal to 4.44%. The note is secured by equipment with a net book value of $10,642 as of June 30, 2019.
|
11,400
|
|
|
8,299
|
|
In April 2019, the Company entered into a $4,000 convertible, non-revolving credit note with a bank. The credit note will convert to a term loan on August 25, 2019, with a maturity date of July 24, 2024. Interest on borrowings is calculated at a fixed rate per annum equal to 4.64%. The note is secured by equipment with a net book value of $999 as of June 30, 2019.
|
1,029
|
|
|
—
|
|
A $10,000 equipment line with a bank, entered into in December 2017, secured by all equipment purchased with the proceeds of the loan. Interest is calculated on any outstanding amounts using a fixed rate of 4.5%. The equipment line converted to a term loan in September 2018, with a maturity date of June 22, 2023. The note is secured by equipment with a net book value of $7,566 as of June 30, 2019.
|
8,650
|
|
|
9,563
|
|
The Closing Date Term Loan and Delayed Draw Term Loan entered into in September 2018 as part of the Credit Facility (see Note 6). The interest rate applicable to the Closing Date Term Loan and Delayed Draw Term Loan is based on a fluctuating rate of interest measured by reference to, at the Company’s election, either (i) the Eurodollar rate, currently LIBOR, or (ii) an alternative base rate. Principal payments required are $52,563 in September 2019, $2,563 in December 2019, $42,625 in March 2020, $2,625 quarterly through September 2020, $3,938 quarterly through September 2022 and $5,250 quarterly through September 2023. The remaining outstanding amounts will be due in September 2023. The loan is secured by substantially all of the assets of the Company, and is subject to certain financial covenants.
|
202,313
|
|
|
202,438
|
|
Total
|
239,469
|
|
|
237,542
|
|
Less debt issuance costs
|
(2,910
|
)
|
|
(3,252
|
)
|
|
236,559
|
|
|
234,290
|
|
Less current maturities
|
(108,722
|
)
|
|
(23,268
|
)
|
Notes payable due after one year
|
$
|
127,837
|
|
|
$
|
211,022
|
|
8. Interest Rate Swap
In order to manage interest rate risk in a cost-efficient manner, the Company entered into an interest rate swap during 2017 whereby the Company agreed to exchange with the counterparty, at specified intervals, the difference between fixed and variable interest amounts calculated by reference to a notional amount. The interest rate swap is not designated for hedge accounting. The change in fair value of the interest rate swap is immediately recognized in earnings, within interest expense.
CHARAH SOLUTIONS, INC.
Notes to Condensed Consolidated & Combined Financial Statements, continued
(dollars in thousands except per share and unit data)
(Unaudited)
As of both
June 30, 2019
and
December 31, 2018
, the notional amount of the interest rate swap was
$150,000
. A fair value liability of $
905
was recorded within other liabilities in the unaudited condensed consolidated balance sheet as of
June 30, 2019
and a fair value asset of
$891
was recorded within other assets in the unaudited condensed consolidated balance sheet as of
December 31, 2018
. The total amount of loss included in interest expense in the unaudited condensed consolidated statement of operations for the
three and six
months ended
June 30, 2019
was
$434
and
$1,796
, respectively, and the total amount of gain subtracted from interest expense in the unaudited condensed combined statement of operations for the
three and six
months ended
June 30, 2018
was
$604
and
$2,228
, respectively.
9. Costs and Estimated Earnings on Uncompleted Contracts
Costs and estimated earnings on uncompleted contracts are as follows:
|
|
|
|
|
|
|
|
|
|
June 30,
2019
|
|
December 31,
2018
|
Costs incurred on uncompleted contracts
|
$
|
369,753
|
|
|
$
|
314,700
|
|
Estimated earnings
|
84,624
|
|
|
96,176
|
|
Total costs and estimated earnings
|
454,377
|
|
|
410,876
|
|
Less billings to date
|
(364,162
|
)
|
|
(325,518
|
)
|
Costs and estimated earnings in excess of billings
|
$
|
90,215
|
|
|
$
|
85,358
|
|
The net balance in process classified on the unaudited condensed consolidated balance sheets is as follows:
|
|
|
|
|
|
|
|
|
|
June 30,
2019
|
|
December 31,
2018
|
Costs and estimated earnings in excess of billings
|
$
|
90,375
|
|
|
$
|
86,710
|
|
Billings in excess of costs and estimated earnings
|
(160
|
)
|
|
(1,352
|
)
|
Net balance in process
|
$
|
90,215
|
|
|
$
|
85,358
|
|
Anticipated losses on long-term contracts are recognized when such losses become evident. As of
June 30, 2019
, and
December 31, 2018
, accruals for anticipated losses on long-term contracts were
$425
and
$677
, respectively.
10. Stock/Unit-Based Compensation
The Limited Liability Company Agreement for Charah Management provided for the issuance of up to
1,000
Series C profits interests (the “Charah Series C Profits Interests”). In 2017, Charah Management adopted the Charah Series C Profits Interest Plan and issued
650
of such units to employees. The Charah Series C Profits Interests participated in distributions to Charah members based on specified rates of return being realized on the Charah Management LLC Series A Membership Interests and the Charah Management LLC Series B Membership Interests. The Charah Series C Profits Interest Plan is no longer in place following our corporate reorganization and related IPO. The Charah Series C Profits Interests would have vested ratably in each of the first
five
anniversaries of their grant date with vesting accelerated upon a change of control. There were
540
Charah Series C Profits Interests unvested at June 18, 2018, which were canceled as a result of the corporate reorganization that occurred upon the closing of the IPO (see further discussion below).
The Limited Liability Company Agreement for Allied provided for the issuance of up to
1,000
Series C profits interests (the “Allied Series C Profits Interests”). In 2017, Allied adopted the Allied Series C Profits Interest Plan and issued
550
of such units to employees. The Allied Series C Profits Interests participated in distributions to Allied members based on specified rates of return being realized on the Allied Power Management, LLC Series A Membership Interests and the Allied Power Management, LLC Series B Membership Interests. The Allied Series C Profits Interest Plan is no longer in place following our corporate reorganization and related IPO. The Allied Series C Profits Interests vested immediately upon grant.
In connection with the corporate reorganization that occurred upon the closing of the IPO, the holders of the Charah Series C Profits Interests and the Allied Series C Profits Interests received
1,215,956
shares of common stock (the “Management Reorganization Consideration”) in exchange for the contribution to the Company of their Charah Series C Profits Interests and Allied Series C Profits Interests. Of these shares,
303,993
vested immediately and
911,963
are subject to time-based vesting
CHARAH SOLUTIONS, INC.
Notes to Condensed Consolidated & Combined Financial Statements, continued
(dollars in thousands except per share and unit data)
(Unaudited)
conditions, as well as performance vesting conditions, based on specified EBITDA targets and achievement of certain safety metrics, which will be determined at a future date. In addition,
272,708
shares of common stock were issued under the Charah Solutions, Inc. 2018 Omnibus Incentive Plan (the “2018 Plan”). Of these shares,
68,176
vested immediately and
204,532
are subject to the same time-based vesting conditions and performance vesting conditions as the shares issued as part of the Management Reorganization Consideration. The fair value of the awards was calculated initially as
$12
per share, and will be updated thereafter for changes at each reporting period until the performance targets are approved by the Company’s board of directors. The fair value of the awards is recognized over the required service period for each grant. As of
June 30, 2019
,
500,253
of the shares subject to time based and performance vesting conditions were vested.
Upon the closing of the IPO, the board of directors of the Company adopted the 2018 Plan, pursuant to which employees, consultants and directors of the Company and its affiliates, including named executive officers, are eligible to receive awards. The 2018 Plan provides for the grant of stock options, stock appreciation rights, restricted stock, restricted stock units, bonus stock, dividend equivalents, other stock-based awards, substitute awards, annual incentive awards and performance awards intended to align the interests of participants with those of Company stockholders. The Company has reserved
3,006,582
shares of common stock for issuance under the 2018 Plan, and all future equity awards described above will be issued pursuant to the 2018 Plan.
During the
three
months ended June 30, 2018, the Company issued
44,198
shares under the 2018 Plan that vested after
one year
. The fair value of the awards was calculated as
$12
per share, which was recognized over the
one year
vesting period. As of
June 30, 2019
,
31,577
of the shares were vested and
12,621
had been forfeited. During the
three
months ended September 30, 2018, the Company issued
45,004
shares under the 2018 Plan that vest after
one year
. The fair value of the awards was calculated as
$7.67
per share, which is being recognized over the
one year
vesting period. As of
June 30, 2019
, none of the shares were vested.
During the
three
months ended
June 30, 2019
, the Company granted
755,455
restricted stock units ("RSUs") under the 2018 Plan that are time-based. Of these RSUs,
116,381
vest after
one year
,
550,106
vest in equal installments over
three years
, and
88,968
vest in equal installments over
four years
. The fair value of these RSUs is based on the market price of the Company's shares on the grant date. As of
June 30, 2019
, none of the shares were vested. Additionally, we granted
330,628
performance share units ("PSUs") under the 2018 Plan that cliff vest after
three years
. The vesting of these PSUs is dependent upon the Company's achievement of a certain stock price metrics. The fair value of the PSUs was determined using a binomial lattice model based upon the grant date stock price, a risk-free interest rate of
2.29%
based upon the U.S. Treasury yield curve in effect at the time of the grants, and an assumed volatility rate of
30%
based upon a comparable public company analysis. As of
June 30, 2019
, none of the shares were vested.
A summary of the Company’s non-vested share activity for the
six
months ended
June 30, 2019
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted-Average Fair Value
|
|
Weighted-Average Remaining Contractual Terms (Years)
|
|
Aggregate Intrinsic Value
|
Outstanding as of December 31, 2018
|
|
1,198,703
|
|
|
$
|
11.84
|
|
|
0.77
|
|
$
|
10,009
|
|
Granted
|
|
1,086,083
|
|
|
5.95
|
|
|
|
|
|
Forfeited
|
|
(187,327
|
)
|
|
11.21
|
|
|
|
|
|
Vested
|
|
(531,830
|
)
|
|
10.69
|
|
|
|
|
|
Outstanding as of June 30, 2019
|
|
1,565,629
|
|
|
$
|
7.13
|
|
|
1.73
|
|
$
|
8,611
|
|
Stock-based compensation expense related to the shares issued as part of the Management Reorganization Consideration and the 2018 Plan was
$799
and
$1,189
during the
three
months ended
June 30, 2019
and
2018
, respectively, and
$1,007
and
$1,189
during the
six
months ended
June 30, 2019
and
2018
, respectively.
As of
June 30, 2019
, total unrecognized stock-based compensation expense related to non-vested awards, net of estimated forfeitures, was
$6,077
, and is expected to be recognized over a weighted-average period of
1.97
years. The total fair value of awards vested for the
three and six
months ended
June 30, 2019
was
$379
and
$5,685
, respectively.
CHARAH SOLUTIONS, INC.
Notes to Condensed Consolidated & Combined Financial Statements, continued
(dollars in thousands except per share and unit data)
(Unaudited)
11. Commitments and Contingencies
We are party to a lawsuit filed against North Carolina by an environmental advocacy group alleging that the issuance by the state of certain permits associated with our Brickhaven clay mine reclamation site exceeded the state’s power. Although the state’s authority to issue the bulk of the permits (i.e., the allowance to reclaim the original site with coal ash) was upheld, the portion of the permits that allows us to “cut and prepare” an additional portion of the site was held by the North Carolina Superior Court to exceed the relevant agency’s statutory authority. The North Carolina Superior Court’s decision was reversed and remanded back to the North Carolina Office of Administrative Hearing. Dispositive motions filed by us and the North Carolina Department of Environmental Quality are pending before the North Carolina Office of Administrative Hearing.
Allied and its affiliate, Allied Power Resources, LLC, have been named in a collective action lawsuit filed in the U.S. District Court for the Northern District of Illinois, alleging violations of the Fair Labor Standards Act, and which includes related class claims alleging violations of the Illinois Minimum Wage Law and the Pennsylvania Minimum Wage Act for failure to pay overtime. This case is one of a series filed against companies in the oil, gas and energy industries in Illinois and Texas. The parties mediated this case in November 2018 and reached a settlement, contingent upon court approval. With respect to such settlement, the joint motion to approve the settlement has been submitted to and is pending with the court for approval.
In addition to the above matters, we are from time to time party to various lawsuits, claims and other legal proceedings that arise in the ordinary course of our business. With respect to all such lawsuits, claims and proceedings, we record reserves when it is probable a liability has been incurred and the amount of loss can be reasonably estimated. Although it is difficult to predict the ultimate outcome of these lawsuits, claims and proceedings, we do not believe that the ultimate disposition of any of these matters, individually or in the aggregate, would have a material adverse effect on our results of operations, financial position or cash flows. We maintain liability insurance for certain risks that is subject to certain self-insurance limits.
We believe amounts previously recorded are sufficient to cover any liabilities arising from the proceedings with all outstanding legal claims. Except as reflected in such accruals, we are currently unable to estimate a range of reasonably possible loss, or a range of reasonably possible loss in excess of the amount accrued, for outstanding legal matters.
12. Business Segment and Related Information
The Company has identified the following reportable segments, Environmental Solutions and Maintenance and Technical Services, as each met the quantitative threshold of generating revenues equal to or greater than 10% of the combined revenue of all operating segments.
The accounting policies applied to determine the segment information are the same as those described under “Critical Accounting Policies and Estimates” in the Annual Report on Form 10-K for the year ended December 31, 2018. Management evaluates the performance of each segment based on segment gross profit, which is calculated as revenues less cost of sales. For the
six
months ended
June 30, 2019
and
2018
, there were no intersegment revenues or other intersegment transactions. Segment assets are also evaluated by management based on each segment’s investment in property and equipment. Assets (other than property and equipment and goodwill) are not allocated to segments.
Summarized financial information with respect to the reportable segments is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2019
|
Environmental Solutions
|
|
Maintenance and Technical Services
|
|
All
Other
|
|
Total
|
Segment revenue
|
$
|
36,950
|
|
|
$
|
83,986
|
|
|
$
|
—
|
|
|
$
|
120,936
|
|
Segment gross (loss) profit
|
(9,188
|
)
|
|
7,123
|
|
|
—
|
|
|
(2,065
|
)
|
Segment depreciation and amortization expense
|
1,376
|
|
|
2,012
|
|
|
1,990
|
|
|
5,378
|
|
CHARAH SOLUTIONS, INC.
Notes to Condensed Consolidated & Combined Financial Statements, continued
(dollars in thousands except per share and unit data)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2018
|
Environmental Solutions
|
|
Maintenance and Technical Services
|
|
All
Other
|
|
Total
|
Segment revenue
|
$
|
90,113
|
|
|
$
|
105,610
|
|
|
$
|
—
|
|
|
$
|
195,723
|
|
Segment gross profit
|
22,096
|
|
|
8,453
|
|
|
—
|
|
|
30,549
|
|
Segment depreciation and amortization expense
|
5,334
|
|
|
1,378
|
|
|
1,992
|
|
|
8,704
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2019
|
Environmental Solutions
|
|
Maintenance and Technical Services
|
|
All
Other
|
|
Total
|
Segment revenue
|
$
|
95,333
|
|
|
$
|
188,861
|
|
|
$
|
—
|
|
|
$
|
284,194
|
|
Segment gross (loss) profit
|
(921
|
)
|
|
14,235
|
|
|
—
|
|
|
13,314
|
|
Segment depreciation and amortization expense
|
3,690
|
|
|
3,966
|
|
|
3,979
|
|
|
11,635
|
|
Expenditures for segment assets
|
6,957
|
|
|
4,502
|
|
|
32
|
|
|
11,491
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2018
|
Environmental Solutions
|
|
Maintenance and Technical Services
|
|
All
Other
|
|
Total
|
Segment revenue
|
$
|
137,897
|
|
|
$
|
213,355
|
|
|
$
|
—
|
|
|
$
|
351,252
|
|
Segment gross profit
|
34,565
|
|
|
15,082
|
|
|
—
|
|
|
49,647
|
|
Segment depreciation and amortization expense
|
10,744
|
|
|
2,407
|
|
|
3,984
|
|
|
17,135
|
|
Expenditures for segment assets
|
3,445
|
|
|
4,788
|
|
|
—
|
|
|
8,233
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2019
|
Environmental Solutions
|
|
Maintenance and Technical Services
|
|
All
Other
|
|
Total
|
Segment property and equipment, net
|
$
|
48,578
|
|
|
$
|
38,430
|
|
|
$
|
281
|
|
|
$
|
87,289
|
|
Segment goodwill
|
57,591
|
|
|
16,622
|
|
|
—
|
|
|
74,213
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2018
|
Environmental Solutions
|
|
Maintenance and Technical Services
|
|
All
Other
|
|
Total
|
Segment property and equipment, net
|
$
|
47,467
|
|
|
$
|
41,155
|
|
|
$
|
319
|
|
|
$
|
88,941
|
|
Segment goodwill
|
57,591
|
|
|
16,622
|
|
|
—
|
|
|
74,213
|
|
The following is a reconciliation of segment gross (loss) profit to net (loss) income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
June 30, 2019
|
|
June 30, 2018
|
|
June 30, 2019
|
|
June 30, 2018
|
Segment gross (loss) profit
|
$
|
(2,065
|
)
|
|
$
|
30,549
|
|
|
$
|
13,314
|
|
|
$
|
49,647
|
|
General and administrative expenses
|
(17,400
|
)
|
|
(18,937
|
)
|
|
(31,385
|
)
|
|
(33,319
|
)
|
Interest expense, net
|
(4,102
|
)
|
|
(5,543
|
)
|
|
(9,154
|
)
|
|
(9,674
|
)
|
Income from equity method investment
|
663
|
|
|
699
|
|
|
1,217
|
|
|
1,286
|
|
Income tax provision
|
5,628
|
|
|
(2,906
|
)
|
|
6,389
|
|
|
(2,906
|
)
|
Net (loss) income
|
$
|
(17,276
|
)
|
|
$
|
3,862
|
|
|
$
|
(19,619
|
)
|
|
$
|
5,034
|
|
CHARAH SOLUTIONS, INC.
Notes to Condensed Consolidated & Combined Financial Statements, continued
(dollars in thousands except per share and unit data)
(Unaudited)
The following is a reconciliation of segment assets to total assets:
|
|
|
|
|
|
|
|
|
|
As of June 30, 2019
|
|
As of December 31, 2018
|
Segment property and equipment, net
|
$
|
87,289
|
|
|
$
|
88,941
|
|
Segment goodwill
|
74,213
|
|
|
74,213
|
|
Non-segment assets
|
285,758
|
|
|
295,747
|
|
Total assets
|
$
|
447,260
|
|
|
$
|
458,901
|
|
Summarized financial information with respect to the types of revenue recognized is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2019
|
Products
|
|
Percentage of Completion
|
|
Services
|
|
Total
|
Revenue
|
$
|
24,890
|
|
|
$
|
11,900
|
|
|
$
|
84,146
|
|
|
$
|
120,936
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2018
|
Products
|
|
Percentage of Completion
|
|
Services
|
|
Total
|
Revenue
|
$
|
27,401
|
|
|
$
|
60,969
|
|
|
$
|
107,353
|
|
|
$
|
195,723
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2019
|
Products
|
|
Percentage of Completion
|
|
Services
|
|
Total
|
Revenue
|
$
|
47,402
|
|
|
$
|
46,207
|
|
|
$
|
190,585
|
|
|
$
|
284,194
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2018
|
Products
|
|
Percentage of Completion
|
|
Services
|
|
Total
|
Revenue
|
$
|
31,566
|
|
|
$
|
102,652
|
|
|
$
|
217,034
|
|
|
$
|
351,252
|
|
13. Income Taxes
The Company’s income tax benefit was
$5,628
and
$6,389
for the
three and six
months ended
June 30, 2019
, respectively, and the income tax expense was
$2,906
for each of the
three and six
months ended
June 30, 2018
.
The Company’s effective income tax rate for the
three and six
months ended
June 30, 2019
was
24.5%
and
24.9%
, respectively. The effective income tax rate includes the effect of state income taxes, nondeductible items and benefits for noncontrolling interests. When calculating the annual estimated effective income tax rate for the
three and six
months ended
June 30, 2019
, the Company was subject to a loss limitation rule because the year-to-date ordinary loss exceeded the full-year expected ordinary loss. The tax benefit for the year-to-date ordinary loss was limited to the amount that would be recognized if the year-to-date ordinary loss were the anticipated ordinary loss for the full year.
The Company evaluates its effective income tax rate at each interim period and adjusts it accordingly as facts and circumstances warrant. The determination of the annual estimated effective income tax rate at each interim period requires certain estimates and judgments including, but not limited to, the expected operating income for the year, estimated permanent differences between book and tax amounts, and the likelihood of recovering deferred tax assets generated in the current year, primarily net operating loss and other carryforwards, and our ability to uphold certain tax positions. The accounting estimates used to compute the provision for income taxes may change as new events occur and additional information is obtained.
At
June 30, 2019
, deferred tax assets, net of deferred tax liabilities, was
$9,136
. A valuation allowance is recorded if it is more likely than not that a portion of the Company’s deferred tax assets will not be realized. The Company evaluates both the positive and negative evidence in determining the need for a valuation allowance on its deferred tax assets. Realization of net operating losses and other carryforwards is dependent upon generating sufficient taxable income in the appropriate jurisdiction prior to the expiration of the carryforward periods, which involves business plans, planning opportunities and expectations about future outcomes. Although realization is not assured, management believes it is more likely than not that our deferred tax assets
CHARAH SOLUTIONS, INC.
Notes to Condensed Consolidated & Combined Financial Statements, continued
(dollars in thousands except per share and unit data)
(Unaudited)
will be realized. Therefore, no valuation allowance has been recorded for our deferred tax assets. The Company will continue to evaluate the need for a valuation allowance on its deferred tax assets in future periods.
14. (Loss) Earnings Per Share
Basic (loss) earnings per share is computed by dividing net (loss) income attributable to the Company’s stockholders by the weighted-average number of shares outstanding during the period. Diluted (loss) earnings per share reflects all potential dilutive ordinary shares outstanding during the period and is computed by dividing net (loss) income attributable to the Company’s stockholders by the weighted-average number of shares outstanding during the period increased by the number of additional shares that would have been outstanding as dilutive securities. For the periods prior to the IPO, the average number of ordinary shares outstanding used to calculate basic and diluted (loss) earnings per share was based on the ordinary shares that were outstanding at the time of the IPO.
As a result of the net loss per share for the
three and six
months ended
June 30, 2019
, the inclusion of all potentially dilutive shares would be anti-dilutive. Therefore, dilutive shares (in thousands) of
1,388
and
1,191
were excluded from the computation of the weighted-average shares for diluted net loss per share for the
three and six
months ended
June 30, 2019
, respectively.
Basic and diluted (loss) earnings per share is determined using the following information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
June 30, 2019
|
|
June 30, 2018
|
|
June 30, 2019
|
|
June 30, 2018
|
Numerator:
|
|
|
|
|
|
|
|
Net (loss) income attributable to Charah Solutions, Inc.
|
$
|
(18,026
|
)
|
|
$
|
3,220
|
|
|
$
|
(20,845
|
)
|
|
$
|
4,025
|
|
|
|
|
|
|
|
|
|
Denominator (in thousands):
|
|
|
|
|
|
|
|
Weighted-average shares outstanding
|
29,559
|
|
|
24,478
|
|
|
29,374
|
|
|
24,096
|
|
Dilutive share-based awards
|
—
|
|
|
870
|
|
|
—
|
|
|
846
|
|
Total weighted-average shares outstanding, including dilutive shares
|
29,559
|
|
|
25,348
|
|
|
29,374
|
|
|
24,942
|
|
|
|
|
|
|
|
|
|
Basic (loss) earnings per share
|
$
|
(0.61
|
)
|
|
$
|
0.13
|
|
|
$
|
(0.71
|
)
|
|
$
|
0.17
|
|
Diluted (loss) earnings per share
|
$
|
(0.61
|
)
|
|
$
|
0.13
|
|
|
$
|
(0.71
|
)
|
|
$
|
0.16
|
|
15. Subsequent Event
On May 29, 2019, the ash remediation contract for the Company’s Brickhaven location was deemed terminated, consistent with the Company’s previously communicated expectations. Per the terms of this contract, the customer is obligated to pay the Company for the recovery of project development costs, expected site closure costs, and post-maintenance costs upon deemed termination. After negotiations to date with customer, the Company expects the amount of the recovered costs will be approximately
$80,000
and expects the payment of these costs to be received by the payment deadline of August 27, 2019.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with the historical financial statements and related notes included in “Item 1. Financial Statements” of this Quarterly Report. This discussion contains “forward
‑
looking statements” reflecting our current expectations, estimates and assumptions concerning events and financial trends that may affect our future operating results or financial position. Actual results and the timing of events may differ materially from those contained in these forward
‑
looking statements due to a number of factors. Factors that could cause or contribute to such differences include, but are not limited to, capital expenditures, economic and competitive conditions, and regulatory changes and other uncertainties, as well as those factors discussed below and elsewhere in this Quarterly Report. Please read “Cautionary Note Regarding Forward
‑
Looking Statements” included elsewhere in this Quarterly Report. Except as otherwise required by applicable law, we assume no obligation to update any of these forward
‑
looking statements.
Our Predecessor and Charah Solutions, Inc.
Charah Solutions, Inc. (together with its subsidiaries, “Charah Solutions,” the “Company,” “we,” “us” or “our”) was formed as a Delaware corporation in January 2018 and did not conduct any material business operations prior to the reorganization transactions described below under “—Initial Public Offering” other than certain activities related to the initial public offering (the “IPO”), which was completed on June 18, 2018. In connection with the closing of the IPO and pursuant to the terms and conditions of the master reorganization agreement dated June 13, 2018, Charah Management LLC, a Delaware limited liability company (“Charah Management”), and Allied Power Holdings, LLC, a Delaware limited liability company (“Allied Power Holdings”), became wholly owned subsidiaries of us.
Through our ownership of Charah Management and Allied Power Holdings, we own the outstanding equity interests in Charah, LLC, a Kentucky limited liability company (“Charah”), and Allied Power Management, LLC, a Delaware limited liability company (“Allied”), the subsidiaries through which we operate our businesses.
Overview
We were formed in January 2018 in anticipation of the IPO to be a holding company for Charah Management and Allied Power Holdings. The historical financial data presented herein as of
June 30, 2019
and for the periods after the June 18, 2018 corporate reorganization is that of Charah and Allied on a consolidated basis, and is on a combined basis for the periods prior to the June 18, 2018 corporate reorganization. Allied was formed in May 2017 and did not commence operations until July 2017.
We are a leading provider of mission-critical environmental and maintenance services to the power generation industry, enabling our customers to address challenges related to the remediation of ash ponds and landfills at open and closed power plant sites while continuously operating and providing necessary electric power to communities nationwide. We offer a suite of coal ash management and recycling, environmental remediation and outage maintenance services. We also design and implement solutions for complex environmental projects (such as coal ash pond closures) and facilitate coal ash recycling through byproduct sales and other beneficial use services. We operate in over 20 states, resulting in an overall footprint and density in key markets that we believe is difficult to replicate.
We are an environmental remediation and maintenance company and conduct our operations through two segments: Environmental Solutions and Maintenance and Technical Services.
Environmental Solutions
. Our Environmental Solutions segment includes remediation and compliance services, as well as byproduct sales offerings. Remediation and compliance services are associated with our customers’ need for multi-year environmental improvement and sustainability initiatives, whether driven by proactive engagement, by power generation customers, by regulatory requirements or by consumer expectations and standards. Byproduct sales support both our power generation customers’ desire to profitably recycle recurring and historic volumes of coal combustion residuals and our ultimate end customers’ need for high-quality, cost-effective raw material substitutes.
Maintenance and Technical Services
. Our Maintenance and Technical Services segment includes fossil services and, from and after May 2017 when Allied was created, nuclear services. Fossil services are the recurring and mission-critical management of coal ash and the routine maintenance, outage services, facility maintenance and staffing solutions for coal-fired power generation facilities. Nuclear services, which we market under the Allied Power brand name, include routine maintenance, outage services, facility maintenance and staffing solutions for nuclear power generation facilities. The Maintenance and Technical Services segment offerings are most closely associated with the ongoing operations of power plants, whether in the form of daily environmental management or required maintenance services (typically during planned outages).
Initial Public Offering
On June 18, 2018, we completed the IPO of 7,352,941 shares of the Company’s common stock, par value $0.01 per share. The net proceeds of the IPO to us prior to offering expenses were approximately $59.2 million. We used a portion of the IPO proceeds to pay off approximately $40.0 million of the borrowings outstanding under the Term Loan (as defined below), and any remaining net proceeds were used to pay offering expenses or used for general corporate purposes.
How We Evaluate Our Operations
We use a variety of financial and operational metrics to assess the performance of our operations, including:
•
Revenues;
•
Gross Profit;
•
Operating Income;
•
Adjusted EBITDA; and
•
Adjusted EBITDA Margin.
Revenues
We analyze our revenues by comparing actual revenues to our internal projections for a given period and to prior periods to assess our performance. We believe that revenues are a meaningful indicator of the demand and pricing for our services.
Gross Profit
We analyze our gross profit, which we define as revenues less cost of sales, to measure our financial performance. We believe that gross profit is a meaningful metric because it provides insight on financial performance of our revenue streams without consideration of company overhead. When analyzing gross profit, we compare actual gross profit to our internal projections for a given period and to prior periods to assess our performance.
Operating Income
We analyze our operating income, which we define as revenues less cost of sales and general and administrative expenses, to measure our financial performance. We believe that operating income is a meaningful metric because it provides insight on profitability and true operating performance based on the historical cost basis of our assets. When analyzing operating income, we compare actual operating income to our internal projections for a given period and to prior periods to assess our performance.
Adjusted EBITDA and Adjusted EBITDA Margin
We view Adjusted EBITDA and Adjusted EBITDA margin, which are non-GAAP financial measures, as important indicators of performance. We define Adjusted EBITDA as net (loss) income before interest expense, income taxes, depreciation and amortization, equity-based compensation, non-recurring legal and start-up costs and expenses, the Brickhaven contract deemed termination revenue reversal, and transaction-related expenses and other items. Adjusted EBITDA margin represents the ratio of Adjusted EBITDA to total revenues. See “—Non-GAAP Financial Measures” below for more information and a reconciliation of Adjusted EBITDA to net (loss) income, the most directly comparable financial measure calculated and presented in accordance with GAAP.
Key Factors Affecting Our Business and Financial Statements
Ability to Capture New Contracts and Business Opportunities
Our ability to grow revenue and earnings is contingent on maintaining and increasing our market share, renewing existing contracts and obtaining additional contracts from proactive bidding on contracts with new and existing customers. We proactively work with existing customers ahead of contract end dates to secure contract renewals. We also leverage the embedded long-term nature of our customer relationships to obtain insight into and to capture new business opportunities across our platform.
Seasonality of Business
Based on historic trends, we expect our operating results to vary seasonally. Nuclear power generators perform turnaround and outages in the off-peak months when demand is lower and generation capacity is less constrained. As a result, our nuclear services offerings may have higher revenue volume in the spring and fall months. Variations in normal weather patterns can also cause changes in consumption of energy, which may influence demand and timing of associated services for our fossil services offerings. Inclement weather can impact construction-related activities associated with pond and landfill remediation, which affects the timing of revenue generation for our remediation and compliance services. Our byproduct sales offerings are also impacted during the winter months when the utilization of cement and cement products is generally lower.
Project-Based Nature of Environmental Remediation Mandates
We believe there is a significant pipeline of coal ash ponds and landfills that will require remediation and/or closure in the future. Due to their scale and complexity, these environmental remediation projects are typically completed over long periods of time. As a result, our revenues from these projects can fluctuate over time. Some of our revenues from projects are recognized using the percentage of completion method of accounting for GAAP purposes. This method of revenue recognition is determined by estimating the percentage of completion on a job and the ultimate estimated gross profit margin on the job. The timing of revenues recorded for financial reporting purposes may differ from actual billings to customers, sometimes resulting in costs and billings in excess of actual revenues. Because of the risks in estimating gross profit margins for long-term jobs, actual results may differ from these estimates.
Byproduct Recycling Market Dynamics
There is a growing demand for recycled coal ash across a variety of applications, in addition to the market forces and governmental regulations driving the need to dispose of coal ash in an environmentally sensitive manner. Pricing of byproduct sales is driven by supply and demand market dynamics, in addition to the chemical and physical properties of the ash. As demand increases for the end-products that use recycled coal-fired power generation waste byproducts (i.e., concrete for construction and infrastructure projects), the demand for recycled coal ash also typically rises. These fluctuations affect the relative demand for our byproduct sales offerings. In recessionary periods, construction and infrastructure spending and the corresponding need for concrete may decline. However, this unfavorable effect may be partially offset by an increase in the demand for recycled coal ash during recessionary periods given that coal ash is more cost-effective than other alternatives.
Power Generation Industry Spend on Environmental Liability Management and Regulatory Requirements
The power generation industry has increased annual spending on environmental liability management. We believe this is the result of not only regulatory requirements and consumer pressure, but also the industry’s increasing focus on environmental stewardship. Continued increases in spending on environmental liability management by our customers should result in increased demand for services across our platform.
Cost Management and Capital Investment Efficiency
Our main operating costs consist of labor, material and equipment costs and equipment maintenance. We maintain a focus on cost management and efficiency, including monitoring labor costs, both in terms of wage rates and headcount, along with other costs such as materials and equipment. We maintain a disciplined approach to capital expenditure decisions, which are typically associated with specific contract requirements. Furthermore, we strive to extend the useful life of our equipment through the application of a well-planned routine maintenance program.
How We Generate Revenues
The Environmental Solutions segment generates revenue through our remediation and compliance services, as well as our byproduct sales offerings. Our remediation and compliance services primarily consist of designing, constructing, managing, remediating and closing ash ponds and landfills on customer-owned sites. Our byproduct sales offerings include the recycling of recurring and contracted volumes of coal-fired power generation waste byproducts, such as bottom ash, fly ash and gypsum byproduct, each of which can be used for various industrial purposes. Our platform of services is contracted for terms generally ranging from 18 months to five years, thereby reducing financial volatility. In excess of 90% of our services work is structured as time and materials, cost reimbursable or unit price contracts, which significantly reduces the risk of loss on contracts and provides gross margin visibility. Revenue from management contracts is recognized when the ash is hauled to the landfill or the management services are provided. Revenue from the sale of ash is recognized when it is delivered to the customer.
The Maintenance and Technical Services segment generates revenue through our fossil services and nuclear services offerings. Maintenance and Technical Services segment offerings are most closely associated with the ongoing operations of power plants, whether in the form of daily environmental management or required maintenance services (typically during planned outages). Our fossil services offerings focus on recurring and mission-critical management of coal ash and routine maintenance, outage services and staffing solutions for coal-fired power generation facilities to fulfill an environmental service need of our customers in handling their waste byproducts. Over the last five years, we have achieved an approximately 90% renewal rate for contracts in our fossil services offerings up for renewal. Our nuclear services operations, which we market under the Allied Power brand name, consist of a broad platform of mission-critical professional, technical and craft services spanning the entire asset life cycle of a nuclear power generator. The services are performed on the customer’s site and the contract terms typically range between three to five years. Revenues are billed and paid during the periods of time work is being executed. Our nuclear services revenues tend to be seasonal and may experience significant increases during periods of maintenance outages. This combination of the maintenance and environmental-related services deepens customer connectivity and drives long-term relationships which we believe are critical for renewing existing contracts, winning incremental business from existing customers at new sites and adding new customers.
Factors Impacting the Comparability of Results of Operations
Public Company Costs
As a new public company, we have incurred, and expect to continue to incur, incremental recurring and certain non-recurring costs related to our transition to a publicly traded and taxable corporation, including the costs of the IPO and the costs associated with the initial implementation of our Sarbanes-Oxley Section 404 internal control implementation and testing. We also have incurred, and expect to incur, additional significant and recurring expenses as a publicly traded company, including costs associated with the employment of additional personnel, compliance under the Exchange Act, annual and quarterly reports to common stockholders, registrar and transfer agent fees, national stock exchange fees, audit fees, incremental director and officer liability insurance costs, and director and officer compensation.
Income Taxes
Charah Solutions is a “C” Corporation under the Internal Revenue Code of 1986, as amended, and, as a result, will be subject to U.S. federal, state and local income taxes. In connection with the IPO, Charah and Allied, which previously were flow-through entities for income tax purposes and were indirect subsidiaries of two partnerships, Charah Management and Allied Power Holdings, respectively, became indirect subsidiaries of the Company. Prior to the contribution, Charah and Allied passed through their taxable income to the owners of the partnerships for U.S. federal and other state and local income tax purposes and, thus, were not subject to U.S. federal income taxes or other state or local income taxes, except for franchise tax at the state level (at less than 1% of modified pre-tax earnings). Accordingly, the financial data attributable to Charah and Allied prior to the contribution on June 18, 2018 contains no provision for U.S. federal income taxes or income taxes in any state or locality other than franchise taxes.
Results of Operations
Overview of Financial Results
Delays in new work awards, the $10.0 million revenue reversal associated with the Brickhaven contract payment (as discussed below), and unanticipated cost increases at one remediation site led to disappointing results in the second quarter of 2019. As a result of long sales cycles, driven by the increase in the size, scope and complexity of remediation and compliance projects that we are bidding on, the pace of new awards in 2019 has not been sufficient to offset the impact of projects completed during the year. As these projects have gotten larger and more complex, utility customers are seeking regulatory clarity as well as cost recovery through rate relief. Though this delay is adversely impacting our 2019 results, we expect demand for our remediation and compliance services to grow as more than 1,000 ash ponds and landfills still require EPA-mandated closure or remediation. In addition, our success rate in winning awards for the
three and six
months ended
June 30, 2019
has been in line with the
three and six
months ended
June 30, 2018
, though the size of projects awarded has been smaller than anticipated.
On May 29, 2019, the ash remediation contract for our Brickhaven location was deemed terminated, consistent with the our previously communicated expectations. Per the terms of this contract, the customer is obligated to pay us for the recovery of project development costs, expected site closure costs, and post-maintenance costs upon deemed termination. After negotiations to date with customer, we expect the amount of the recovered costs will be approximately $80 million and expect the payment of these costs to be received by the payment deadline of August 27, 2019.
The Maintenance and Technical Services segment results for the
three and six
months ended
June 30, 2019
were in line with our expectations but were lower than the results for the
three and six
months ended
June 30, 2018
primarily as a result of fewer nuclear refueling outages and a reduction in the scope of work. A substantial portion of our nuclear services operations are driven by scheduled nuclear maintenance outages, which are typically planned for every 12 to 24 months.
Within our byproduct sales offerings, which is a part of our Environmental Solutions segment, the roll-out of our technology initiatives, including our MP618 thermal beneficiation technology and our grinding technology, has been slower than previously anticipated, resulting in a lower than expected contribution to operating results. Customer interest in the MP618 technology appears to be strong, and contracts are currently under negotiation.
Our second quarter results did not meet expectations, but we continue to believe our market opportunities remain strong. We have signed approximately $275 million in new contracts year-to-date and are in exclusive negotiations on approximately $400 million in additional contracts. Though the timing of future awards is difficult to determine, we believe we are well-positioned to capture a significant portion of a large and growing addressable market.
Our primary sources of liquidity and capital resources are cash flows generated by operating activities and borrowings under the Credit Facility (as defined below). In part due to longer sales cycles, driven by the increase in the size, scope and complexity of remediation and compliance projects that we are bidding on, we have experienced unexpected contract initiation delays and project completion delays which have adversely affected our revenue and overall liquidity. Our lengthy and complex
projects require us to expend large sums of working capital, and delays in payment receipts, project commencement or project completion can adversely affect our financial position and the cash flows that normally would fund our expenditures. On August 13, 2019, we entered into an amendment to the Credit Facility. See “—Liquidity and Capital Resources—Our Debt Agreements—Existing Credit Facility” below for more information about the Credit Facility and the amendment.
Additional information regarding the results of operations follows below.
Three Months Ended
June 30, 2019
Compared to Three Months Ended
June 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
June 30,
|
|
Change
|
|
2019
|
|
2018
|
|
$
|
|
%
|
|
(dollars in thousands)
|
Revenues:
|
|
|
|
|
|
|
|
|
Environmental Solutions
|
$
|
36,950
|
|
|
$
|
90,113
|
|
|
$
|
(53,163
|
)
|
|
(59.0
|
)%
|
Maintenance and Technical Services
|
83,986
|
|
|
105,610
|
|
|
(21,624
|
)
|
|
(20.5
|
)%
|
Total revenue
|
120,936
|
|
|
195,723
|
|
|
(74,787
|
)
|
|
(38.2
|
)%
|
Cost of sales
|
123,001
|
|
|
165,174
|
|
|
(42,173
|
)
|
|
(25.5
|
)%
|
Gross (Loss) Profit:
|
|
|
|
|
|
|
|
|
Environmental Solutions
|
(9,188
|
)
|
|
22,096
|
|
|
(31,284
|
)
|
|
(141.6
|
)%
|
Maintenance and Technical Services
|
7,123
|
|
|
8,453
|
|
|
(1,330
|
)
|
|
(15.7
|
)%
|
Total gross (loss) profit
|
(2,065
|
)
|
|
30,549
|
|
|
(32,614
|
)
|
|
(106.8
|
)%
|
General and administrative expenses
|
17,400
|
|
|
18,937
|
|
|
(1,537
|
)
|
|
(8.1
|
)%
|
Operating (loss) income
|
(19,465
|
)
|
|
11,612
|
|
|
(31,077
|
)
|
|
(267.6
|
)%
|
Interest expense, net
|
(4,102
|
)
|
|
(5,543
|
)
|
|
1,441
|
|
|
26.0
|
%
|
Income from equity method investment
|
663
|
|
|
699
|
|
|
(36
|
)
|
|
(5.2
|
)%
|
(Loss) income before taxes
|
(22,904
|
)
|
|
6,768
|
|
|
(29,672
|
)
|
|
(438.4
|
)%
|
Income tax provision
|
(5,628
|
)
|
|
2,906
|
|
|
(8,534
|
)
|
|
(100.0
|
)%
|
Net (loss) income
|
(17,276
|
)
|
|
3,862
|
|
|
(21,138
|
)
|
|
(547.3
|
)%
|
Less income attributable to non-controlling interest
|
750
|
|
|
642
|
|
|
108
|
|
|
16.8
|
%
|
Net (loss) income attributable to Charah Solutions, Inc.
|
(18,026
|
)
|
|
3,220
|
|
|
(21,246
|
)
|
|
(659.8
|
)%
|
Adjusted EBITDA
(1)
|
$
|
(2,353
|
)
|
|
$
|
25,999
|
|
|
$
|
(28,352
|
)
|
|
(109.1
|
)%
|
Adjusted EBITDA margin
(1)
|
(1.9)%
|
|
13.3%
|
|
(15.2)%
|
|
N/A
|
|
|
(1)
|
Adjusted EBITDA and Adjusted EBITDA margin are non-GAAP financial measures. For a definition of Adjusted EBITDA and Adjusted EBITDA margin, as well as a reconciliation of Adjusted EBITDA to net (loss) income, our most directly comparable GAAP financial measure, and a calculation of Adjusted EBITDA, please read “—Non-GAAP Financial Measures” below.
|
Revenues
.
Revenues decreased
$74.8 million
, or
38.2%
, for the three months ended
June 30, 2019
to
$120.9 million
as compared to
$195.7 million
for the three months ended
June 30, 2018
. The change in revenues by segment was as follows:
Environmental Solutions Revenues.
Environmental Solutions segment revenues decreased
$53.2 million
, or
59.0%
, for the three months ended
June 30, 2019
to
$37.0 million
as compared to
$90.1 million
for the three months ended
June 30, 2018
. The decrease in revenues was primarily driven by the project completions within our remediation and compliance services business and the $10.0 million revenue reversal associated with the Brickhaven contract payment.
Maintenance and Technical Services Revenues.
Maintenance and Technical Services revenues decreased
$21.6 million
, or
20.5%
, for the three months ended
June 30, 2019
to
$84.0 million
as compared
$105.6 million
for the three months ended
June 30, 2018
. The decrease was primarily attributable to reduced scope of nuclear outages and fewer outages in the period, partially offset by a net overall increase in revenues from our fossil services offerings.
Gross (Loss) Profit
.
Gross (loss) profit decreased
$32.6 million
, or
106.8%
, for the three months ended
June 30, 2019
to a gross loss of
$2.1 million
as compared to a gross profit of
$30.5 million
for the three months ended
June 30, 2018
. As a percentage of revenue, gross profit was
(1.7)%
and 15.6% for the three months ended
June 30, 2019
and
2018
, respectively. The decrease in gross profit margin was primarily driven by the $10.0 million revenue reversal associated with the Brickhaven contract payment and one project-specific issue continuing from the first quarter of 2019. The change in gross profit by segment was as follows:
Environmental Solutions Gross (Loss) Profit.
Gross (loss) profit for our Environmental Solutions segment decreased
$31.3 million
, or
141.6%
, for the three months ended
June 30, 2019
to a gross loss of
$9.2 million
as compared to a gross profit of
$22.1 million
for the three months ended
June 30, 2018
. The decrease in gross profit was primarily driven by the $10.0 million revenue reversal associated with the Brickhaven contract payment, project completions and one project-specific issue continuing from the first quarter of 2019.
Maintenance and Technical Services Gross Profit.
Gross profit for our Maintenance and Technical Services segment decreased
$1.3 million
, or
15.7%
, for the three months ended
June 30, 2019
to
$7.1 million
as compared to
$8.5 million
for the three months ended
June 30, 2018
. The decrease was primarily attributable to reduced scope of nuclear outages and fewer outages in the period, partially offset by a net overall increase in gross profit from our fossil services offerings.
General & Administrative Expenses
.
General and administrative expenses decreased
$1.5 million
, or
8.1%
, for the three months ended
June 30, 2019
to
$17.4 million
as compared to
$18.9 million
for the three months ended
June 30, 2018
. The decrease was primarily attributable to a reduction in non-recurring legal costs and expenses, non-recurring start-up costs and non-recurring transaction costs, as disclosed in our Adjusted EBITDA calculation included herein, partially offset by increased expenses due to incremental costs associated with being a public company as of June 2018.
Interest Expense, Net
.
Interest expense, net decreased
$1.4 million
, or
26.0%
, for the three months ended
June 30, 2019
to
$4.1 million
as compared to
$5.5 million
for the three months ended
June 30, 2018
. The decrease was primarily attributable to a reduction in interest rates associated with the refinancing of our term loan in September 2018, partially offset by a non-cash $0.4 million mark-to-market expense associated with the change in value of our interest rate swap.
Income from Equity Method Investment
.
Income from equity method investment remained at
$0.7 million
for the three months ended
June 30, 2019
as compared to
$0.7 million
for the three months ended
June 30, 2018
. There was a slight decrease period-over-period, which was primarily attributable to a reduction in ash volumes generated by the utility and available for sale by us.
Net (Loss) Income
.
Net income decreased
$21.1 million
, or
547.3%
, for the three months ended
June 30, 2019
to a net loss of
$17.3 million
as compared to net income of
$3.9 million
for the three months ended
June 30, 2018
. The decrease was primarily attributable to decreased gross profit as disclosed above, offset by the change in income tax provision of $8.5 million.
Adjusted EBITDA and Adjusted EBITDA Margin
. Adjusted EBITDA decreased
$28.4 million
, or
109.1%
, for the three months ended
June 30, 2019
to
$(2.4) million
as compared to
$26.0 million
for the three months ended
June 30, 2018
, and our Adjusted EBITDA margin for the three months ended
June 30, 2019
was
(1.9)%
, a decrease of
15.2%
from
13.3%
for the three months ended
June 30, 2018
.
For a definition of Adjusted EBITDA and Adjusted EBITDA margin, as well as a reconciliation of Adjusted EBITDA to net (loss) income, the most directly comparable GAAP financial measure, and a calculation of Adjusted EBITDA, see “—Non-GAAP Financial Measures” below.
Six
Months Ended
June 30, 2019
Compared to
Six
Months Ended
June 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
|
June 30,
|
|
Change
|
|
2019
|
|
2018
|
|
$
|
|
%
|
|
(dollars in thousands)
|
Revenues:
|
|
|
|
|
|
|
|
|
Environmental Solutions
|
$
|
95,333
|
|
|
$
|
137,897
|
|
|
$
|
(42,564
|
)
|
|
(30.9
|
)%
|
Maintenance and Technical Services
|
188,861
|
|
|
213,355
|
|
|
(24,494
|
)
|
|
(11.5
|
)%
|
Total revenue
|
284,194
|
|
|
351,252
|
|
|
(67,058
|
)
|
|
(19.1
|
)%
|
Cost of sales
|
270,880
|
|
|
301,605
|
|
|
(30,725
|
)
|
|
(10.2
|
)%
|
Gross (Loss) Profit:
|
|
|
|
|
—
|
|
|
|
Environmental Solutions
|
(921
|
)
|
|
34,565
|
|
|
(35,486
|
)
|
|
(102.7
|
)%
|
Maintenance and Technical Services
|
14,235
|
|
|
15,082
|
|
|
(847
|
)
|
|
(5.6
|
)%
|
Total gross profit
|
13,314
|
|
|
49,647
|
|
|
(36,333
|
)
|
|
(73.2
|
)%
|
General and administrative expenses
|
31,385
|
|
|
33,319
|
|
|
(1,934
|
)
|
|
(5.8
|
)%
|
Operating (loss) income
|
(18,071
|
)
|
|
16,328
|
|
|
(34,399
|
)
|
|
(210.7
|
)%
|
Interest expense, net
|
(9,154
|
)
|
|
(9,674
|
)
|
|
520
|
|
|
(5.4
|
)%
|
Income from equity method investment
|
1,217
|
|
|
1,286
|
|
|
(69
|
)
|
|
(5.4
|
)%
|
(Loss) income before taxes
|
(26,008
|
)
|
|
7,940
|
|
|
(33,948
|
)
|
|
(427.6
|
)%
|
Income tax provision
|
(6,389
|
)
|
|
2,906
|
|
|
(9,295
|
)
|
|
(319.9
|
)%
|
Net (loss) income
|
(19,619
|
)
|
|
5,034
|
|
|
(24,653
|
)
|
|
(489.7
|
)%
|
Less income attributable to non-controlling interest
|
1,226
|
|
|
1,009
|
|
|
217
|
|
|
21.5
|
%
|
Net (loss) income attributable to Charah Solutions, Inc.
|
(20,845
|
)
|
|
4,025
|
|
|
(24,870
|
)
|
|
(617.9
|
)%
|
Adjusted EBITDA
(1)
|
$
|
6,553
|
|
|
$
|
43,361
|
|
|
$
|
(36,808
|
)
|
|
(84.9
|
)%
|
Adjusted EBITDA margin
(1)
|
2.3%
|
|
12.3%
|
|
(10.0)%
|
|
N/A
|
|
|
(1)
|
Adjusted EBITDA and Adjusted EBITDA margin are non-GAAP financial measures. For a definition of Adjusted EBITDA and Adjusted EBITDA margin, as well as a reconciliation of Adjusted EBITDA to net (loss) income, our most directly comparable GAAP financial measure, and a calculation of Adjusted EBITDA, please read “—Non-GAAP Financial Measures” below.
|
Revenues
.
Revenues decreased
$67.1 million
, or
19.1%
, for the
six
months ended
June 30, 2019
to
$284.2 million
as compared to
$351.3 million
for the
six
months ended
June 30, 2018
. The change in revenues by segment was as follows:
Environmental Solutions Revenues.
Environmental Solutions segment revenues decreased
$42.6 million
, or
30.9%
, for the
six
months ended
June 30, 2019
to
$95.3 million
as compared to
$137.9 million
for the
six
months ended
June 30, 2018
. The decrease was primarily attributable to project completions and the $10.0 million revenue reversal associated with the Brickhaven contract payment, partially offset by a net overall increase in revenues from our byproduct sales offerings.
Maintenance and Technical Services Revenues.
Maintenance and Technical Services revenues decreased
$24.5 million
, or
11.5%
, for the
six
months ended
June 30, 2019
to
$188.9 million
as compared
$213.4 million
for the
six
months ended
June 30, 2018
. The decrease was primarily attributable to reduced scope of nuclear outages and fewer outages in the period, partially offset by a net overall increase in revenues from our fossil services offerings.
Gross (Loss) Profit
.
Gross (loss) profit decreased
$36.3 million
, or
73.2%
, for the
six
months ended
June 30, 2019
to
$13.3 million
as compared to
$49.6 million
for the
six
months ended
June 30, 2018
. As a percentage of revenue, gross profit was
4.7%
and 14.1% for the
six
months ended
June 30, 2019
and
2018
, respectively. The decrease in gross profit margin was primarily driven by project completions, the $10.0 million revenue reversal associated with the Brickhaven contract payment, adverse weather-related impacts and site-specific issues at three remediation sites. The change in gross profit by segment was as follows:
Environmental Solutions Gross (Loss) Profit.
Gross (loss) profit for our Environmental Solutions segment decreased
$35.5 million
, or
102.7%
, for the
six
months ended
June 30, 2019
to a gross loss of
$0.9 million
as compared to a gross profit of
$34.6 million
for the
six
months ended
June 30, 2018
. The decrease in gross profit was primarily driven by the net roll off of certain jobs within our remediation and compliance services offerings, the $10.0 million revenue reversal associated with the Brickhaven contract payment, adverse weather-related impacts and site-specific issues at three remediation sites.
Maintenance and Technical Services Gross Profit.
Gross profit for our Maintenance and Technical Services segment decreased
$0.8 million
, or
5.6%
, for the
six
months ended
June 30, 2019
to
$14.2 million
as compared to
$15.1 million
for the
six
months ended
June 30, 2018
. The decrease was primarily attributable to a net overall reduction in gross profit from our fossil services offerings, partially offset by a net overall increase in gross profit from our nuclear services offerings.
General & Administrative Expenses
.
General and administrative expenses decreased
$1.9 million
, or
5.8%
, for the
six
months ended
June 30, 2019
to
$31.4 million
as compared to
$33.3 million
for the
six
months ended
June 30, 2018
. The decrease was primarily attributable to a reduction in non-recurring legal costs and expenses, non-recurring start-up costs and non-recurring transaction costs, as disclosed in our Adjusted EBITDA calculation included herein, partially offset by increased expenses due to the addition of SCB in March 2018 and incremental costs associated with being a public company as of June 2018.
Interest Expense, Net
.
Interest expense, net decreased
$0.5 million
, or
5.4%
, for the
six
months ended
June 30, 2019
to
$9.2 million
as compared to
$9.7 million
for the
six
months ended
June 30, 2018
. The decrease was primarily attributable to a reduction in interest rates associated with the refinancing of our term loan in September 2018, partially offset by non-cash $1.8 million mark-to-market expenses associated with the change in value of our interest rate swap.
Income from Equity Method Investment
.
Income from equity method investment decreased
$0.1 million
, or
5.4%
, for the
six
months ended
June 30, 2019
to
$1.2 million
as compared to
$1.3 million
for the
six
months ended
June 30, 2018
. There was a slight decrease period-over-period, which was primarily attributable to a reduction in ash volumes generated by the utility and available for sale by us.
Net (Loss) Income
.
Net (loss) income decreased
$24.7 million
, or
489.7%
, for the
six
months ended
June 30, 2019
to a net loss of
$19.6 million
as compared to net income of
$5.0 million
for the
six
months ended
June 30, 2018
. The decrease was primarily attributable to decreased gross profit as disclosed above, offset by an income tax provision of $9.3 million.
Adjusted EBITDA and Adjusted EBITDA Margin
. Adjusted EBITDA decreased
$36.8 million
, or
84.9%
, for the
six
months ended
June 30, 2019
to
$6.6 million
as compared to
$43.4 million
for the
six
months ended
June 30, 2018
, and our Adjusted EBITDA margin for the
six
months ended
June 30, 2019
was
2.3%
, a decrease of
10.0%
from
12.3%
for the
six
months ended
June 30, 2018
.
For a definition of Adjusted EBITDA and Adjusted EBITDA margin, as well as a reconciliation of Adjusted EBITDA to net (loss) income, the most directly comparable GAAP financial measure, and a calculation of Adjusted EBITDA, see “—Non-GAAP Financial Measures” below.
Liquidity and Capital Resources
Our primary sources of liquidity and capital resources are cash flows generated by operating activities and borrowings under the Credit Facility (as defined below). In part due to longer sales cycles, driven by the increase in the size, scope and complexity of remediation and compliance projects that we are bidding on, we have experienced unexpected contract initiation delays and project completion delays which have adversely affected our revenue and overall liquidity. Our lengthy and complex projects require us to expend large sums of working capital, and delays in payment receipts, project commencement or project completion can adversely affect our financial position and the cash flows that normally would fund our expenditures. But for the Amendment (as defined below), as of June 30, 2019, we would not have been in compliance with the requirement to maintain a consolidated net leverage ratio of 3.75 to 1.00 under the Credit Facility. On August 13, 2019, we entered into the Amendment, pursuant to which, among other things, the lenders agreed to waive such non-compliance. In addition, pursuant to the terms of the Amendment, the Credit Facility was amended to revise the required financial covenant ratios so that we are not required to comply with any financial covenants through March 30, 2020. The Amendment also adds a requirement to make two additional scheduled prepayments of outstanding loans under the Credit Facility, including a payment of $50.0 million on or before September 13, 2019, and an additional payment of $40.0 million on or before March 31, 2020. See “—Our Debt Agreements—Existing Credit Facility” below for more information about the Credit Facility and the Amendment.
As of June 30, 2019, we had approximately $9.6 million in cash and believe that we will have sufficient liquidity from cash on hand, cash generated from operations, including the Brickhaven deemed termination payment, and our existing credit facilities to fund our business for the next 12 months. If our liquidity is not sufficient to satisfy our debt payment obligations under the Amendment or our planned operations, we may need to alter our operating activities or consider other sources of liquidity, such as refinancing all or part of our existing debt, selling assets, borrowing additional funds or issuing additional equity and debt, which we may not be able to do on commercially reasonable terms or at all.
Cash Flows
The following table sets forth our cash flow data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
|
June 30,
|
|
Change
|
|
2019
|
|
2018
|
|
$
|
|
%
|
|
(dollars in thousands)
|
Cash flows used in operating activities
|
$
|
(3,428
|
)
|
|
$
|
(2,186
|
)
|
|
$
|
(1,242
|
)
|
|
56.8
|
%
|
Cash flows used in investing activities
|
(9,984
|
)
|
|
(27,145
|
)
|
|
17,161
|
|
|
(63.2
|
)%
|
Cash flows provided by financing activities
|
16,093
|
|
|
12,065
|
|
|
4,028
|
|
|
33.4
|
%
|
Net change in cash
|
$
|
2,681
|
|
|
$
|
(17,266
|
)
|
|
$
|
19,947
|
|
|
115.5
|
%
|
Operating Activities
Net cash used in operating activities increased
$1.2 million
, or
56.8%
, for the
six
months ended
June 30, 2019
to
$3.4 million
as compared to
$2.2 million
for the
six
months ended
June 30, 2018
. The change in cash flows used in operating activities was primarily attributable to the period over period decrease in net income.
Investing Activities
Net cash used in investing activities decreased
$17.2 million
, or
63.2%
, for the
six
months ended
June 30, 2019
to
$10.0 million
as compared to
$27.1 million
for the
six
months ended
June 30, 2018
. The change in cash flows used in investing activities was primarily attributable to the non-recurrence of the $20.0 million used for business acquisitions in March 2018, net of cash received, partially offset by a
$3.3 million
increase in purchases of property and equipment in the first half of 2019.
Financing Activities
Net cash provided by financing activities increased
$4.0 million
, or
33.4%
, for the
six
months ended
June 30, 2019
to
$16.1 million
as compared to
$12.1 million
for the
six
months ended
June 30, 2018
. The change in cash flows provided by financing activities was primarily attributable to a
$15.4 million
increase in the principal balance on the revolver.
Working Capital
Our working capital, which we define as total current assets less total current liabilities, totaled
$(17.8) million
and
$74.1 million
at
June 30, 2019
and
December 31, 2018
, respectively. This decrease in working capital for the six months ended June 30, 2019 was primarily the result of the increase in notes payable, current maturities, related to the Company's recent Credit Facility amendment.
Our Debt Agreements
Former Credit Agreement
On October 25, 2017, we entered into a credit agreement (the “2017 Credit Agreement”) by and among us, the lenders party thereto from time to time and Regions Bank, as administrative agent. The 2017 Credit Agreement provided for a revolving credit facility (the “2017 Credit Facility”) with a principal amount of up to $45.0 million. The 2017 Credit Facility permitted extensions of credit up to the lesser of $45.0 million and a borrowing base that was calculated by us based upon a percentage of the value of our eligible accounts receivable and eligible inventory, and approved by the administrative agent.
The interest rates per annum applicable to the loans under the 2017 Credit Facility were based on a fluctuating rate of interest measured by reference to, at our election, either (i) an adjusted London Inter-bank Offered Rate (“LIBOR”) plus a 2.00% borrowing margin, or (ii) an alternative base rate plus a 1.00% borrowing margin. Customary fees were payable in respect of the 2017 Credit Facility and included (i) commitment fees in an amount equal to 0.50% of the daily unused portions of the 2017 Credit Facility and (ii) a 2.00% fee on outstanding letters of credit. The 2017 Credit Facility contained various representations and warranties, and restrictive covenants. If excess availability under the 2017 Credit Facility fell below the greater of 15% of the loan cap amount or $6.75 million, we were required to comply with a minimum fixed charge coverage ratio of 1.0 to 1.0. The 2017 Credit Facility did not otherwise contain financial maintenance covenants.
The 2017 Credit Facility had a scheduled maturity date of October 25, 2022; however, all amounts outstanding were repaid in September 2018 as a result of the refinancing discussed below.
Former CS Term Loan
On October 25, 2017, we entered into a credit agreement by and among us, the lenders party thereto from time to time and Credit Suisse AG, Cayman Islands Branch, as administrative agent, providing for a term loan (the “2017 CS Term Loan”) with an initial commitment of $250.0 million. The 2017 CS Term Loan provided that we had the right at any time to request incremental term loans up to the greater of (i) the excess, if any, of $25.0 million over the aggregate amount of all incremental 2017 Credit Facility commitments and incremental 2017 CS Term Loan commitments previously utilized and (ii) such other amount so long as such amount at such time could be incurred without causing the pro forma consolidated secured leverage ratio to exceed 3.25 to 1.00.
The interest rates per annum applicable to the loans under the 2017 CS Term Loan were based on a fluctuating rate of interest measured by reference to, at our election, either (i) LIBOR plus a 6.25% borrowing margin or (ii) an alternative base rate plus a 5.25% borrowing margin. The 2017 CS Term Loan contained various representations and warranties, and restrictive covenants. In addition, we were required to comply with a maximum senior secured net leverage ratio of 5.00 to 1.00 beginning March 31, 2018, decreasing to 4.50 to 1.00 as of March 31, 2019, and further decreasing to 4.00 to 1.00 as of March 31, 2020 and thereafter. The principal amount of the 2017 CS Term Loan amortized at a rate of 7.5% per annum with all remaining outstanding amounts under the 2017 CS Term Loan due on the 2017 CS Term Loan maturity date. We received net proceeds from the IPO of $59.2 million prior to deducting offering expenses. We used these net proceeds to pay offering expenses and to pay off $40.0 million of the borrowings outstanding under the 2017 CS Term Loan, which would otherwise have been required through June 2020.
The 2017 CS Term Loan had a scheduled maturity date of October 25, 2024; however, all amounts outstanding were repaid in September 2018 as a result of the refinancing discussed below.
Existing Credit Facility
On September 21, 2018, we entered into a credit agreement (the “Credit Facility”) by and among us, the lenders party thereto from time to time and Bank of America, as administrative agent (the “Administrative Agent”). The Credit Facility includes:
•
a revolving loan not to exceed $50.0 million (the “Revolving Loan”);
•
a term loan of $205.0 million (the “Closing Date Term Loan”); and
|
|
•
|
a commitment to loan up to a further $25.0 million in term loans, which expires in March 2020 (the “Delayed Draw Commitment” and the term loans funded under such Delayed Draw Commitment, the “Delayed Draw Term Loan”, together with the Closing Date Term Loan, the “Term Loan”).
|
All amounts associated with the Revolving Loan and the Term Loan under the Credit Facility mature in September 2023, the interest rates per annum applicable to the loans under the Credit Facility are based on a fluctuating rate of interest measured by reference to, at our election, either (i) the Eurodollar rate, currently LIBOR, or (ii) an alternative base rate. Various margins are added to the interest rate based upon our consolidated net leverage ratio. Customary fees are payable in respect of the Credit Facility and include (i) commitment fees (ranging from 0.25% to 0.35% based upon our consolidated net leverage ratio) for unused portions of the Credit Facility and (ii) fees on outstanding letters of credit (ranging from 1.30% to 2.10% based upon our consolidated net leverage ratio). Amounts borrowed under the Credit Facility are secured by essentially all of the assets of the Company.
The Credit Facility contains various representations and warranties, and restrictive covenants that, among other things and subject to specified exceptions, restrict the ability of us and our restricted subsidiaries to grant liens, incur indebtedness (including guarantees), make investments, engage in mergers and acquisitions, make dispositions of assets, make restricted payments or change the nature of our or their business. The Credit Facility contains financial covenants related to the consolidated net leverage ratio and the fixed charge coverage ratio (of 1.20 to 1.00). As of
June 30, 2019
, we were required to comply with a consolidated net leverage ratio of 3.75 to 1.00 through March 30, 2020, decreasing to 3.50 to 1.00 as of March 31, 2020, further decreasing to 3.25 to 1.00 as of March 31, 2021 and finally decreasing to 3.00 to 1.00 as of March 31, 2022 and thereafter.
The Credit Facility also contains certain affirmative covenants, including reporting requirements, such as delivery of financial statements, certificates and notices of certain events, maintaining insurance and providing additional guarantees and collateral in certain circumstances.
The Credit Facility includes customary events of default including non-payment of principal, interest or fees, violation of covenants, inaccuracy of representations or warranties, cross default to certain other material indebtedness, bankruptcy and insolvency events, invalidity or impairment of guarantees or security interests, material judgments and change of control.
The Revolving Loan provides a principal amount of up to $50.0 million reduced by outstanding letters of credit. As of
June 30, 2019
, $
35.2
million was outstanding on the Revolving Loan and $
12.0
million of letters of credit were outstanding.
But for the amendment described below, as of June 30, 2019, we would not have been in compliance with the requirement
to maintain a consolidated net leverage ratio of 3.75 to 1.00. On August 13, 2019, we entered into Amendment No. 2 to Credit Agreement and Waiver (the “Amendment”), pursuant to which, among other things, the required lenders agreed to waive such non-compliance.
In addition, pursuant to the terms of the Amendment, the Credit Facility was amended to revise the required financial covenant ratios such that, after giving effect to the Amendment, we are not required to comply with any financial covenants through March 30, 2020. After March 30, 2020, we will be required to comply with a consolidated net leverage ratio of 6.50 to 1.00 from March 31, 2020 through September 29, 2020, decreasing to 3.00 to 1.00 as of September 30, 2020 and thereafter. After giving effect to the Amendment, we will also be required to comply with a fixed charge coverage ratio of .75 to 1.00 as of March 31, 2020, .90 to 1.00 as of June 30, 2020 and 1.20 to 1.00 thereafter.
As consideration for the accommodations described above, we have agreed that amounts borrowed pursuant to the Delayed Draw Commitment will not exceed $15.0 million at any one time outstanding (without reducing the overall Delayed Draw Commitment amount). In addition, any loans Delayed Draw Term Loans shall incur additional interest at a rate equal to 10.0% per annum on all amounts outstanding in excess of $10.0 million of Delayed Draw Term Loans. Further, the margin of interest that will be charged on all outstanding loans has been increased to 4.00% for loans based on LIBOR and 3.00% for loans based on the alternative base rate. The Amendment revised the amount of (i) the commitment fees to 0.35% at all times for unused portions of the Credit Facility and (ii) fees on outstanding letters of credit to 3.35% at all times. The Amendment also adds a requirement to make two additional scheduled prepayments of outstanding loans under the Credit Facility, including a payment of $50.0 million on or before September 13, 2019 and an additional payment of $40.0 million on or before March 31, 2020.
The Company believes collection of the payment related to the early completion of the Brickhaven deemed termination (see Note 15) is probable before the
$50.0 million
September 13, 2019 required debt payment, and such proceeds will be used to fund this required prepayment. While management believes it is unlikely, any delay in the receipt of this payment could require the Company to amend or obtain a waiver from the Administrative Agent to remain in compliance with the Amendment to the Credit Agreement. There is no assurance that we could obtain such amendment or waiver.
Regarding the March 2020 debt payment of
$40.0 million
, management has evaluated its ability to make this payment using our most recent financial forecast. Based on this evaluation, management believes it is probable that the Company will be able to make this payment. Management’s assessment is based upon the anticipated availability under the revolving credit facility, projected cash flows from operations, and prudent working capital management. The financial forecast does not anticipate incurring material unexpected losses in existing operations or new work awards being materially delayed. If these or other unanticipated headwinds in our business occur, the Company could be required to amend or obtain a waiver from the Administrative Agent regarding the
$40.0 million
payment due in March 2020, and there is no assurance that we could obtain such amendment or waiver.
The Amendment also includes revisions to the restrictive covenants, including removing certain exceptions to the restrictions on our ability to make acquisitions, to make investments and to make dividends or other distributions. After giving effect to the Amendment, we will not be permitted to make any distributions or dividends to our shareholders without the consent of the required lenders.
Equipment Financing Facilities
We have entered into various equipment financing arrangements to finance the acquisition of certain equipment (the “Equipment Financing Facilities”). As of
June 30, 2019
, we had equipment lines of credit allowing borrowings of $
4.0
million, of which $
1.0
million was utilized. In addition, we had $
36.1
million of equipment notes outstanding as of
June 30, 2019
. Each of the Equipment Financing Facilities includes non-financial covenants, and, as of
June 30, 2019
, we were in compliance with these covenants.
Non-GAAP Financial Measures
Adjusted EBITDA and Adjusted EBITDA Margin
Adjusted EBITDA and Adjusted EBITDA margin are not financial measures determined in accordance with GAAP.
We define Adjusted EBITDA as net (loss) income before interest expense, income taxes, depreciation and amortization, equity-based compensation, non-recurring legal and start-up costs and expenses, the Brickhaven contract deemed termination revenue reversal, and transaction-related expenses and other items. Adjusted EBITDA margin represents the ratio of Adjusted EBITDA to total revenues.
We believe Adjusted EBITDA and Adjusted EBITDA margin are useful performance measures because they allow for an effective evaluation of our operating performance when compared to our peers, without regard to our financing methods or capital structure. We exclude the items listed above from net (loss) income in arriving at Adjusted EBITDA because these amounts are either non-recurring or can vary substantially within our industry depending upon accounting methods and book values of assets, capital structures and the method by which the assets were acquired. Adjusted EBITDA should not be considered as an alternative to, or more meaningful than, net (loss) income determined in accordance with GAAP. Certain items excluded from Adjusted EBITDA are significant components in understanding and assessing a company’s financial performance, such as a company’s cost of capital and tax structure, as well as the historic costs of depreciable assets, none of which are reflected in Adjusted EBITDA. Our presentation of Adjusted EBITDA should not be construed as an indication that our results will be unaffected by the items excluded from Adjusted EBITDA. Our computations of Adjusted EBITDA may not be identical to other similarly titled measures of other companies. We use Adjusted EBITDA margin to measure the success of our business in managing our cost base and improving profitability. The following table presents a reconciliation of Adjusted EBITDA to net (loss) income, our most directly comparable financial measure calculated and presented in accordance with GAAP, along with our Adjusted EBITDA margin.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
June 30,
|
|
June 30,
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
(dollars in thousands)
|
Net (loss) income attributable to Charah Solutions, Inc.
|
$
|
(18,026
|
)
|
|
$
|
3,220
|
|
|
$
|
(20,845
|
)
|
|
$
|
4,025
|
|
Interest expense, net
|
4,102
|
|
|
5,543
|
|
|
9,154
|
|
|
9,674
|
|
Income tax provision
|
(5,628
|
)
|
|
2,906
|
|
|
(6,389
|
)
|
|
2,906
|
|
Depreciation and amortization
|
5,378
|
|
|
8,704
|
|
|
11,635
|
|
|
17,135
|
|
Elimination of certain non-recurring legal costs and expenses
(1)
|
—
|
|
|
2,489
|
|
|
(746
|
)
|
|
5,169
|
|
Elimination of certain non-recurring start-up costs
(2)
|
—
|
|
|
688
|
|
|
—
|
|
|
1,480
|
|
Equity-based compensation
|
799
|
|
|
1,292
|
|
|
1,007
|
|
|
1,403
|
|
Brickhaven contract deemed termination revenue reversal
|
10,000
|
|
|
—
|
|
|
10,000
|
|
|
—
|
|
Transaction-related expenses and other items
(3)
|
1,022
|
|
|
1,157
|
|
|
2,737
|
|
|
1,569
|
|
Adjusted EBITDA
|
$
|
(2,353
|
)
|
|
$
|
25,999
|
|
|
$
|
6,553
|
|
|
$
|
43,361
|
|
Adjusted EBITDA margin
(4)
|
(1.9)%
|
|
13.3%
|
|
2.3%
|
|
12.3%
|
|
|
(1)
|
Represents non-recurring legal costs and expenses, which amounts are not representative of those that we historically incur in the ordinary course of our business. Negative amounts represent insurance recoveries related to these matters.
|
|
|
(2)
|
Represents non-recurring start-up costs associated with the startup of Allied and our nuclear services offerings, including the setup of financial operations systems and modules, pre-contract expenses to obtain initial contracts and the hiring of operational staff. Because these costs are associated with the initial setup of the Allied business to initiate the operations involved in our nuclear services offerings, these costs are non-recurring in the normal course of our business.
|
|
|
(3)
|
Represents SCB transaction expenses, executive severance costs, IPO-related costs and other miscellaneous items.
|
|
|
(4)
|
Adjusted EBITDA margin is a non-GAAP financial measure that represents the ratio of Adjusted EBITDA to total revenues. We use Adjusted EBITDA margin to measure the success of our businesses in managing our cost base and improving profitability.
|
Off-Balance Sheet Arrangements
We currently have no material off-balance sheet arrangements.
Contractual Obligations
As of June 30, 2019, there have been no material changes, outside the ordinary course of business, in our outstanding contractual obligations from those disclosed within “Management’s Discussion and Analysis of Financial Condition and Results of Operation,” as contained in our Annual Report on Form 10-K for the year ended December 31, 2018.
Subsequent to June 30, 2019, we entered into the Amendment to the Credit Facility, pursuant to which, among other things, a requirement was added to make two additional scheduled prepayments of outstanding loans under the Credit Facility, including a payment of $50.0 million on or before September 13, 2019 and an additional payment of $40.0 million on or before March 31, 2020.
Critical Accounting Policies and Estimates
There were no changes to our critical accounting policies from those disclosed in the Annual Report on Form 10-K for the year ended December 31, 2018.
Recent Accounting Pronouncements
Please see Note 2, “Recent Accounting Pronouncements,” to the consolidated and combined financial statements included elsewhere in this Quarterly Report and Note 2, “Summary of Significant Accounting Policies,” to our consolidated and combined financial statements in the Annual Report on Form 10-K for the year ended December 31, 2018 for a discussion of recent accounting pronouncements.
Under
the Jumpstart Our Business Startups Act (
the
“JOBS Act”)
, we meet the definition of an “emerging growth company,” which allows us to have an extended transition period for complying with new or revised financial accounting standards pursuant to Section 107(b) of the JOBS Act. We intend to take advantage of all of the reduced reporting requirements and exemptions, including the longer phase-in periods for the adoption of new or revised financial accounting standards under Section 107 of the JOBS Act until we are no longer an emerging growth company.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market risk is the risk of loss arising from adverse changes in market rates and prices. Currently, our market risks relate to potential changes in the fair value of our long-term debt due to fluctuations in applicable market interest rates. Going forward, our market risk exposure generally will be limited to those risks that arise in the normal course of business, as we do not engage in speculative, non-operating transactions, nor do we utilize financial instruments or derivative instruments for trading purposes.
Interest Rate Risk
As of
June 30, 2019
, we had
$202.3 million
of debt outstanding under the Term Loan and Delayed Draw Commitment and
$35.2 million
of debt outstanding under the Revolving Loan, with a weighted-average interest rate of 5.1%. A 1.0% increase or decrease in the weighted-average interest rate would increase or decrease interest expense by approximately $2.4 million per year assuming a consistent debt balance and before taking into consideration any impact from our interest rate cap. We currently have an interest rate cap in place with respect to outstanding indebtedness under the Term Loan that provides a ceiling on three-month LIBOR at 2.5% for a notional amount of $150.0 million.
Subsequent to June 30, 2019, we entered into the Amendment to the Credit Facility, pursuant to which, among other things, (i) any Delayed Draw Term Loans shall incur additional interest at a rate equal to 10.0% per annum on all amounts outstanding in excess of $10.0 million of Delayed Draw Term Loans and (ii) the margin of interest that will be charged on all outstanding loans under the Credit Facility has been increased to
4.00%
for loans based on LIBOR and
3.00%
for loans based on the alternative base rate.
Credit Risk
While we are exposed to credit risk in the event of non-performance by counterparties, the majority of our customers are investment grade companies and we do not anticipate non-performance. We mitigate the associated credit risk by performing credit evaluations and monitoring the payment patterns of our customers.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our principal executive officer and principal financial officer, has evaluated
the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d‑15(e) of the Exchange Act) as of the end of the period covered by this Quarterly Report. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives. Based on such evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of
June 30, 2019
, at the reasonable assurance level.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rules 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the quarter ended
June 30, 2019
that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.