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Covia Announces Second Quarter 2019 Results

August 08, 2019
  • Sold 8.2 million tons, up 2% sequentially, with revenues up 4% sequentially
  • Incurred $34 million net loss from continuing operations
  • Improved Adjusted EBITDA to $65 million, up $31 million sequentially
  • Generated $107 million in cash flow from operations
  • Announced $240 million in non-core asset divestitures

INDEPENDENCE, Ohio, Aug. 08, 2019 (GLOBE NEWSWIRE) -- Covia (NYSE:CVIA), a leading provider of mineral-based material solutions for the Industrial and Energy markets, today announced results for the second quarter ended June 30, 2019. As a result of the merger that closed on June 1, 2018, Covia’s 2018 reported results under U.S. generally accepted accounting principles (“GAAP”) include the consolidated financial results of both Unimin Corporation (“Unimin”) and Fairmount Santrol Holdings Inc. (“Fairmount Santrol”) for the seven months ended December 31, 2018, as well as the stand-alone results for Unimin for the five months ended May 31, 2018, including the high-purity quartz (“HPQ”) business reported as discontinued operations. Selected pro forma financial results, which reflect combined Unimin and Fairmount Santrol operations prior to the merger and exclude HPQ results, have been provided as exhibits with this release.

“During the second quarter, our team delivered strong sequential profitability growth through a combination of improved volumes and pricing, and lower costs. These successes, aided by improved working capital, translated into operating cash flow of $107 million during the quarter,” said Richard Navarre, Chairman, President and Chief Executive Officer. “In addition to these operational achievements, we also announced the divesture of non-core assets for $240 million to accelerate the strengthening of our balance sheet.”

“As we move forward, we are executing on multiple initiatives across the organization to reduce costs, optimize assets and organically grow our Industrial segment. We believe these initiatives will improve margins and drive cash flow generation,” Mr. Navarre added. “These actions should serve not only to solidify our balance sheet, but also strengthen our position as a low-cost leader, allowing us to successfully navigate changes in market conditions and capture growth opportunities.”

Second Quarter 2019 Results

  • Total volumes increased 2% sequentially to 8.2 million tons, and decreased 19% compared to the second quarter of 2018 on a pro forma basis.
  • Total revenues increased 4% sequentially to $444.9 million, and decreased 38% compared to the second quarter of 2018 on a pro forma basis.
  • Selling, general and administrative expenses decreased 8% sequentially to $38.6 million, and decreased 25% compared to the second quarter of 2018 on a pro forma basis.
    • Second quarter 2019 selling, general and administrative expenses include $3.3 million in non-cash stock compensation expense.
  • Net loss from continuing operations totaled $34.4 million, or $0.26 per share.
  • Adjusted EBITDA of $65.3 million, an increase of $30.9 million sequentially, compared to $178.6 million in the second quarter of 2018 on a pro forma basis.

Second Quarter 2019 Segment Results

Industrial Segment Results

  • Volumes of 3.6 million tons, a decrease of 6% compared to the second quarter of 2018 on a pro forma basis, driven primarily by softness in building products, which was impacted by unseasonably wet weather. 
  • Revenues of $193.4 million, a decrease of 6% from the second quarter of 2018 on a pro forma basis, driven primarily by lower transportation-related revenues.
  • Segment gross profit and segment contribution margin of $65.1 million, an increase of $3.0 million from the second quarter of 2018 on a pro forma basis, due to increased pricing and cost improvements.
  • Signed several multi-year contracts with Industrial customers since the beginning of the year, representing over 2 million tons of annual volume commitments, which will help leverage fixed costs across Industrial and hybrid plants.

Energy Segment Results

  • Volumes of 4.6 million tons, an increase of 3% sequentially, driven primarily by growth in local sand volumes.
  • Revenues of $251.5 million, an increase of 7% sequentially, driven primarily by higher pricing for Northern White Sand.
  • Segment gross profit of $33.9 million. Segment contribution margin of $40.9 million, an increase of $18.9 million sequentially, driven primarily by improved Northern White Sand pricing and lower costs.
    • Segment contribution margin was negatively impacted by $2.1 million in non-cash charges related to the new lease accounting standard in both periods.
    • Segment contribution margin excludes the impact from idled facilities and excess railcars on gross profit, which Company management believes better reflects the operating performance of the segment.

Improved Liquidity Position

  • Generated cash flow from operations of $106.5 million in the second quarter of 2019, driven by improved profitability and working capital.
  • Total liquidity of $300.8 million as of June 30, 2019, which was composed of $112.1 million in cash and cash equivalents and $188.7 million of availability under the Company’s revolving credit facility.
  • Second quarter 2019 capital expenditures totaled $26.6 million, primarily related to completion of local sand facilities and the expansion project of the Canoitas plant in Mexico.
  • Expect gross cash proceeds of $240 million from the sale of the Calera, Alabama lime facility and the Winchester & Western Railroad. The Company received $135 million in August, and the remainder is expected to be received by the end of the third quarter. Net operating loss carryforwards are expected to minimize cash taxes resulting from these sales. In 2018, these assets generated $20.4 million of segment contribution margin.

Outlook

The Company’s third quarter 2019 expectations are:

  • Industrial and Energy volumes similar to second quarter 2019 levels.

The Company’s full year 2019 expectations are:

  • 2019 selling, general and administrative expenses of $145 million to $155 million, which includes approximately $10 million in non-cash stock compensation expense. This represents a reduction from previous guidance of $160 million to $170 million.
  • 2019 capital expenditures are expected to be in the range of $80 million to $100 million.

Use of Certain Non-GAAP and Adjusted Financial Measures

Covia reports its financial results in accordance with GAAP. However, Covia’s management believes that certain non-GAAP financial measures help to facilitate comparisons of Company operating performance across periods. This release includes segment contribution margin, EBITDA and adjusted EBITDA, which are non-GAAP financial measures, including on a pro forma basis. Covia may also present other non-GAAP financial measures which are identified as “adjusted” results. A reconciliation of all non-GAAP financial measures to the most comparable GAAP financial measures is provided in exhibits attached to this release. Covia defines segment contribution margin as gross profit excluding any selling, general and administrative costs and corporate costs, and also excludes operating costs of idled facilities and excess railcar capacity. Covia defines EBITDA as net income from continuing operations before interest expense, income tax expense, depreciation, depletion and amortization, and adjusted EBITDA as EBITDA before non-cash stock-based compensation, merger-related expenses, restructuring charges, asset impairments and certain other income or expenses. Covia defines pro forma EBITDA as net income from continuing operations before interest expense, income tax expense, depreciation, depletion and amortization for the combined Unimin and Fairmount Santrol operations for the periods reported and excludes HPQ results. Adjusted pro forma EBITDA is defined by Covia as pro forma EBITDA before non-cash stock-based compensation, asset impairments and certain other income or expenses. Pro forma financial results for 2018 and 2017, as shown in the exhibits attached to this release, include combined results of operations for Fairmount Santrol and Unimin for periods preceding the June 1, 2018 merger. Non-GAAP financial measures should not be considered a substitute for the financial results prepared in accordance with GAAP, but should be viewed in addition to the results as reported by Covia. Covia also believes segment contribution margin, pro forma EBITDA and pro forma adjusted EBITDA are useful because they allow management to more effectively evaluate the Company’s operational performance and compare the results of our operations from period to period without regard to the Company’s financing costs or capital structure.

Conference Call

Covia will host a conference call and live webcast on August 8, 2019, at 8:30 a.m. Eastern Time to discuss its financial results. Interested parties are invited to listen to a live audio webcast of the conference call, which will be accessible on the Investor Relations section of the Company’s website (ir.CoviaCorp.com). To access the live webcast, please log in 15 minutes prior to the start of the call to download and install any necessary audio software. An archived replay of the call will also be available on the website. The call may also be accessed live by dialing (877) 273-6113 or, for international callers, (647) 689-5399. The conference ID for the call is 2177169. A replay will be available on the website and can be accessed by dialing (800) 585-8367 or (416) 621-4642. The passcode for the replay is 2177169. The replay of the call will be available through August 15, 2019.

About Covia

Covia is a leading provider of mineral-based material solutions for the Industrial and Energy markets, representing the legacy and combined strengths from the June 2018 merger of Unimin and Fairmount Santrol. The Company is a leading provider of diversified mineral solutions to the glass, ceramics, coatings, foundry, polymers, construction, water filtration, sports and recreation markets. The Company offers a broad array of high-quality products, including high-purity silica sand, nepheline syenite, feldspar, clay, kaolin, resin systems and coated materials, delivered through its comprehensive distribution network. Covia offers its Energy customers an unparalleled selection of proppant solutions, additives, and coated products to enhance well productivity and to address both surface and down-hole challenges in all well environments. Covia has built long-standing relationships with a broad customer base consisting of blue-chip customers. Underpinning these strengths is an unwavering commitment to safety and to sustainable development further enhancing the value that Covia delivers to all of its stakeholders. For more information, visit CoviaCorp.com.

About the Merger

On June 1, 2018, Unimin completed a business combination (“merger”) whereby Fairmount Santrol, now known as Bison Merger Sub I, LLC, merged into a wholly-owned subsidiary of Unimin and ceased to exist as a separate corporate entity. Immediately following the consummation of the merger, Unimin changed its name to Covia Holdings Corporation and began operating under that name. The common stock of Fairmount Santrol was delisted from the NYSE prior to the market opening on June 1, 2018, and Covia commenced trading under the ticker symbol “CVIA” on that same date.

Caution Concerning Forward-Looking Statements

This release contains statements which, to the extent they are not statements of historical or present fact, constitute forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995 (“PSLRA”), and such statements are intended to qualify for the protection of the safe harbor provided by the PSLRA. The words “anticipate,” “estimate,” “expect,” “objective,” “goal,” “project,” “intend,” “plan,” “believe,” “will,” “should,” “may,” “target,” “forecast,” “guidance,” “outlook” and similar expressions generally identify forward-looking statements. Similarly, descriptions of the Company’s objectives, strategies, plans, goals or targets are also forward-looking statements. Forward-looking statements relate to the expectations of the Company’s management as to future occurrences and trends, including statements expressing optimism or pessimism about future operating results or events and projected sales, earnings, capital expenditures and business strategy. Forward-looking statements are based upon a number of assumptions concerning future conditions that may ultimately prove to be inaccurate. Forward-looking statements are based upon management’s then-current views and assumptions regarding future events and operating performance. Although the Company’s management believes the expectations expressed in forward-looking statements are based on reasonable assumptions within the bounds of its knowledge, forward-looking statements involve risks, uncertainties and other factors which may materially affect the Company’s business, financial condition, and results of operations or liquidity.

Forward-looking statements are not guarantees of future performance and actual results may differ materially from those discussed in the forward-looking statements as a result of various factors, including, but not limited to: changes in prevailing economic conditions, including fluctuations in supply of, demand for, and pricing of, the Company’s products; potential business uncertainties relating to the merger, including potential disruptions to the Company’s business and operational relationships, the Company’s ability to achieve anticipated synergies, and the anticipated costs, timing and complexity of the Company’s integration efforts; loss of, or reduction in, business from the Company’s largest customers or their failure to pay the Company; possible adverse effects of being leveraged, including interest rate, event of default or refinancing risks, as well as potentially limiting the Company’s ability to invest in certain market opportunities; the Company’s ability to successfully develop and market new products; the Company’s rights and ability to mine its property and its renewal or receipt of the required permits and approvals from government authorities and other third parties; the Company’s ability to implement and realize efficiencies from capacity expansion plans, and cost reduction initiatives within its time and budgetary parameters; increasing costs or a lack of dependability or availability of transportation services or infrastructure and geographic shifts in demand; changing legislative and regulatory initiatives relating to the Company’s business, including environmental, mining, health and safety, licensing, reclamation and other regulation relating to hydraulic fracturing (and changes in their enforcement and interpretation); silica-related health issues and corresponding litigation; seasonal and severe weather conditions; other operating risks beyond the Company’s control; the risks discussed in the Risk Factors section of the Company’s Annual Report on Form 10-K as filed with the Securities and Exchange Commission (“SEC”) on March 22, 2019; and the other factors discussed from time to time in the Company’s Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and other filings with the SEC. This release should be read in conjunction with such filings, and you should consider all of such risks, uncertainties and other factors carefully in evaluating forward-looking statements. 

You are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date thereof. The Company undertakes no obligation to publicly update forward-looking statements, whether as a result of new information, future events or otherwise. You are advised, however, to consult any further disclosures the Company makes on related subjects in its public announcements and SEC filing.

 

Covia                                
Condensed Consolidated Statements of Income (Loss)                          
(unaudited)                                
    Three Months Ended June 30,     Six Months Ended June 30,  
    2019     2018     2019     2018  
    (in thousands, except per share amounts)     (in thousands, except per share amounts)  
Revenues   $ 444,936     $ 508,418     $ 873,182     $ 878,239  
Cost of goods sold (excluding depreciation, depletion,                                
and amortization shown separately)     345,969       355,311       707,529       615,630  
                                 
Operating expenses                                
Selling, general and administrative expenses(A)     38,644       31,377       80,604       56,601  
Depreciation, depletion and amortization expense     59,204       36,744       117,299       63,875  
Asset impairments     -       12,300       -       12,300  
Restructuring and other charges     9,535       -       11,537       -  
Other operating expense (income), net     1,670       1,150       (4,722 )     1,663  
Operating income (loss) from continuing operations     (10,086 )     71,536       (39,065 )     128,170  
                                 
Interest expense, net     27,866       8,991       53,002       13,669  
Other non-operating expense, net     1,571       38,923       3,758       44,223  
Income (loss) from continuing operations before provision (benefit) for income taxes     (39,523 )     23,622       (95,825 )     70,278  
                                 
Provision (benefit) for income taxes     (5,136 )     6,454       (9,190 )     16,324  
Net income (loss) from continuing operations     (34,387 )     17,168       (86,635 )     53,954  
Less: Net income from continuing operations attributable to the non-controlling interest     7       106       4       106  
Net income (loss) from continuing operations attributable to Covia Holdings Corporation     (34,394 )     17,062       (86,639 )     53,848  
                                 
Income from discontinued operations, net of tax     -       3,830       -       12,587  
                                 
Net income (loss) attributable to Covia Holdings Corporation   $ (34,394 )   $ 20,892     $ (86,639 )   $ 66,435  
                                 
Continuing operations earnings (loss) per share                                
Basic   $ (0.26 )   $ 0.14     $ (0.66 )   $ 0.44  
Diluted     (0.26 )     0.14       (0.66 )     0.44  
                                 
Discontinued operations earnings per share                                
Basic     -       0.03       -       0.11  
Diluted     -       0.03       -       0.10  
                                 
Earnings (loss) per share                                
Basic     (0.26 )     0.17       (0.66 )     0.55  
Diluted   $ (0.26 )   $ 0.17     $ (0.66 )   $ 0.54  
                                 
Weighted average number of shares outstanding                                
Basic     131,458       123,460       131,373       121,552  
Diluted     131,458       124,166       131,373       122,258  
                                 
(A) - Included within selling, general, and administrative expenses is stock compensation expense of $3.3 million and $0.8 million for the three months ended June 30, 2019 and 2018, respectively, and $6.1 million and $0.8 million for the six months ended June 30, 2019 and 2018, respectively.  

 

Covia                
Condensed Consolidated Statements of Cash Flows                
(unaudited)                
    Six Months Ended June 30,  
    2019     2018  
    (in thousands)  
Net income (loss) attributable to Covia Holdings Corporation   $ (86,639 )   $ 66,435  
Adjustments to reconcile net income (loss) to net cash provided by operating activities:                
Depreciation, depletion, and amortization     117,299       68,396  
Amortization of deferred financing costs     2,977       -  
Prepayment penalties on Senior Notes     -       2,213  
Asset impairments     -       12,300  
(Gain) loss on disposal of fixed assets     1,959       (81 )
Change in fair value of interest rate swaps, net     -       (1,581 )
Deferred income tax provision (benefit)     (13,035 )     1,564  
Stock compensation expense     6,082       3,193  
Net income from non-controlling interest     4       106  
Other, net     6,122       4,653  
Change in operating assets and liabilities, net of business combination effect:                
Accounts receivable     (24,701 )     (44,469 )
Inventories     6,320       1,210  
Prepaid expenses and other assets     4,718       (146 )
Accounts payable     (2,260 )     3,362  
Accrued expenses     32,580       (31,572 )
Net cash provided by operating activities     51,426       85,583  
                 
Cash flows from investing activities                
Capital expenditures     (59,469 )     (115,709 )
Cash of HPQ Co. distributed to Sibelco prior to Merger     -       (31,000 )
Payments to Fairmount Santrol Holdings Inc. shareholders, net of cash acquired     -       (64,697 )
Capitalized interest     (3,283 )     -  
Proceeds from sale of fixed assets     130       222  
Net cash used in investing activities     (62,622 )     (211,184 )
                 
Cash flows from financing activities                
Proceeds from borrowings on Term Loan     -       1,650,000  
Payments on Term Loan     (8,250 )     -  
Prepayment on Unimin Term Loans     -       (314,642 )
Prepayment on Senior Notes     -       (100,000 )
Prepayment on Fairmount Santrol Holdings Inc. term loan     -       (695,625 )
Fees for Term Loan and Senior Notes prepayment     -       (36,733 )
Payments on other long-term debt     (76 )     (23,237 )
Payments on finance lease liabilities     (2,237 )     (2,143 )
Fees for Revolver     -       (4,500 )
Cash Redemption payment to Sibelco     -       (520,377 )
Proceeds from share-based awards exercised or distributed     14       2  
Tax payments for withholdings on share-based awards exercised or distributed     (486 )     (1 )
Net cash used in financing activities     (11,035 )     (47,256 )
                 
Effect of foreign currency exchange rate changes     244       1,168  
Decrease in cash and cash equivalents     (21,987 )     (171,689 )
                 
Cash and cash equivalents:                
Beginning of period     134,130       308,059  
End of period   $ 112,143     $ 136,370  

 

Covia                
Condensed Consolidated Balance Sheets                
    (unaudited)     (audited)  
    June 30, 2019     December 31, 2018  
    (in thousands)  
Assets                
Current assets                
Cash and cash equivalents   $ 112,143     $ 134,130  
Accounts receivable, net     284,864       267,268  
Inventories, net     151,801       162,970  
Other receivables     32,535       40,306  
Prepaid expenses and other current assets     16,400       20,941  
Assets held for sale     133,377       -  
Total current assets     731,120       625,615  
                 
Property, plant and equipment, net     2,682,819       2,834,361  
Operating right-of-use assets, net     396,680       -  
Deferred tax assets, net     7,362       8,740  
Goodwill     119,822       131,655  
Intangibles, net     68,212       137,113  
Other non-current assets     30,799       18,633  
Total assets   $ 4,036,814     $ 3,756,117  
                 
Liabilities and Equity                
Current liabilities                
Current portion of long-term debt   $ 15,405     $ 15,482  
Operating lease liabilities, current     67,720       -  
Accounts payable     118,199       145,070  
Accrued expenses     130,025       120,424  
Deferred revenue     18,361       9,737  
Liabilities held for sale     23,306       -  
Total current liabilities     373,016       290,713  
                 
Long-term debt     1,607,041       1,612,887  
Operating lease liabilities, non-current     296,678       -  
Employee benefit obligations     54,209       54,789  
Deferred tax liabilities, net     249,001       267,350  
Other non-current liabilities     87,516       75,425  
Total liabilities     2,667,461       2,301,164  
                 
Equity                
Common stock     1,777       1,777  
Additional paid-in capital     389,000       388,027  
Retained earnings     1,561,320       1,647,959  
Accumulated other comprehensive loss     (100,287 )     (95,225 )
Treasury stock at cost     (483,018 )     (488,141 )
Non-controlling interest     561       556  
Total equity     1,369,353       1,454,953  
Total liabilities and equity   $ 4,036,814     $ 3,756,117  

 

Covia                            
Pro Forma Segment Information                      
(unaudited)                            
(in thousands)                            
    Three Months Ended June 30,  
    2019     2018  
    Covia, As Reported     Covia, As Reported   Fairmount Santrol Pre-Merger(1)   Covia Pro Forma Combined(2)  
Volumes (tons)                            
Energy     4,582       4,274     1,953     6,227  
Industrial     3,596         3,346       470       3,816  
Total volumes     8,178       7,620     2,423     10,043  
                             
Revenues                            
Energy   $ 251,547     $ 326,746   $ 179,345   $ 506,091  
Industrial     193,389       181,672     24,649     206,321  
Total revenues     444,936       508,418     203,994     712,412  
                             
Segment gross profit(3)                            
Energy     33,858       101,288     60,553     161,841  
Industrial     65,109       51,819     10,294     62,113  
Total segment gross profit     98,967       153,107     70,847     223,954  
                             
Segment contribution margin (non-GAAP)(4)                            
Energy     40,912       103,390     64,756     168,146  
Industrial     65,109       51,819     10,294     62,113  
Total segment contribution margin (non-GAAP)   $ 106,021     $ 155,209     75,050   $ 230,259  
                             
Segment contribution margin per ton (non-GAAP)(4)                            
Energy   $ 8.93     $ 24.19   $ 33.16   $ 27.00  
Industrial     18.11       15.49     21.90     16.28  
Total segment contribution margin per ton (non-GAAP)   $ 12.96     $ 20.37   $ 30.97   $ 22.93  
                             
    Six Months Ended June 30,  
    2019     2018  
    Covia, As Reported     Covia, As Reported   Fairmount Santrol Pre-Merger(1)   Covia Pro Forma Combined(2)  
Volumes (tons)                            
Energy     9,014       7,250     4,588     11,838  
Industrial     7,161       6,317     1,048     7,365  
Total volumes     16,175       13,567     5,636     19,203  
                             
Revenues                            
Energy   $ 487,622     $ 534,207   $ 421,526   $ 955,733  
Industrial     385,560       344,032     55,805     399,837  
Total revenues     873,182       878,239     477,331     1,355,570  
                             
Segment gross profit(3)                            
Energy     48,922       166,783     136,668     303,451  
Industrial     116,731       95,826     21,440     117,266  
Total segment gross profit     165,653       262,609     158,108     420,717  
                             
Segment contribution margin (non-GAAP)(4)                            
Energy     62,931       168,885     147,394     316,279  
Industrial     116,731       95,826     21,440     117,266  
Total segment contribution margin (non-GAAP)   $ 179,662     $ 264,711     168,834   $ 433,545  
                             
Segment contribution margin per ton (non-GAAP)(4)                            
Energy   $ 6.98     $ 23.29   $ 32.13   $ 26.72  
Industrial     16.30       15.17     20.46     15.92  
Total segment contribution margin per ton (non-GAAP)   $ 11.11     $ 19.51   $ 29.96   $ 22.58  
                             
    Three Months Ended March 31,                      
    2019                      
    Covia, As Reported                      
Volumes (tons)                            
Energy     4,432                      
Industrial     3,565                      
Total volumes     7,997                      
                             
Revenues                            
Energy   $ 236,075                      
Industrial     192,171                      
Total revenues     428,246                      
                             
Segment gross profit(3)                            
Energy     15,064                      
Industrial     51,622                      
Total segment gross profit     66,686                      
                             
Segment contribution margin (non-GAAP)(4)                            
Energy     22,019                      
Industrial     51,622                      
Total segment contribution margin (non-GAAP)   $ 73,641                      
                             
Segment contribution margin per ton (non-GAAP)(4)                            
Energy   $ 4.97                      
Industrial     14.48                      
Total segment contribution margin per ton (non-GAAP)   $ 9.21                      
__________  
   
(1) 2018 Pre-Merger financial results are for Fairmount Santrol Holdings Inc. ("Fairmount Santrol"), for the two and five months ended May 31, 2018, the day before the merger between Fairmount Santrol and Unimin Corporation ("Unimin") occurred on June 1, 2018.  Such results are based on Fairmount Santrol's unaudited internal financial statements and have been prepared on a basis substantially consistent with Fairmount Santrol's prior audited financial statements, but have not been reviewed by the Company's independent auditors. Both Fairmount Santrol and Unimin reported financial results on a calendar fiscal year.  
   
(2) The unaudited Covia Pro Forma Combined financial results include the aggregate results of operations for legacy Fairmount Santrol and legacy Unimin for periods preceding the June 1, 2018 merger.  
   
(3) In the three and six months ended June 30, 2019, Energy segment gross profit was negatively impacted by the $2.1 million and $4.2 million, respectively, of operating lease expense incurred related to intangible assets that were reclassified to Operating right-of-use assets, net on the Condensed Consolidated Balance Sheets, as a result of the adoption of Topic 842.  The expense, previously recognized as non-cash amortization expense, is now recognized in Cost of goods sold (excluding depreciation, depletion, and amortization shown separately) on the Condensed Consolidated Statement of Income (Loss).

As a result of the June 1, 2018 merger, legacy Fairmount Santrol inventories were written up to fair value under Generally Accepted Accounting Principles ("GAAP").  For the three and six months ended June 30, 2019, $0.2 million and $1.0 million, respectively, of this write-up was expensed through cost of goods sold, thereby reducing segment gross profit.  All of the $0.2 million for the three months ended June 30, 2019 impacted the Industrial segment.  Of the $1.0 million in the six months ended June 30, 2019, $0.4 million impacted the Energy segment and $0.6 million impacted the Industrial segment.
 
   
(4) We define segment contribution margin as segment revenue less segment cost of sales, excluding any depreciation, depletion and amortization expenses, selling, general, and administrative costs, and operating costs of idled facilities and excess railcar capacity.  Operating costs of idled facilities and excess railcar capacity costs, which are both entirely attributable to the Energy segment, were $7.1 million and $2.1 million in the three months ended June 30, 2019 and 2018, respectively, and $14.0 million and $2.1 million in the six months ended June 30, 2019 and 2018, respectively.  Segment contribution margin is a non-GAAP financial measure.  A reconciliation of non-GAAP financial measures to the most comparable GAAP financial measures is provided in tables that follow.  

 

Covia                                  
Pro Forma Net Income (Loss) Information & Reconciliation to Non-GAAP Measures (unaudited)  
The following table reconciles EBITDA and Adjusted EBITDA, non-GAAP financial measures, to the most directly comparable GAAP measure, net income (loss) from continuing operations (amounts in thousands)  
                                   
    Three Months Ended June 30,  
    2019     2018  
    As Reported     As Reported   Fairmount Santrol Pre-Merger(3)   Merger Pro Forma Adjustments(1)   Covia Pro Forma Combined(2)  
Revenues   $ 444,936     $ 508,418   $ 203,994   $ -   $ 712,412  
Cost of goods sold (excluding depreciation, depletion,                                  
and amortization shown separately)(4)     345,969       355,311     133,146     -     488,457  
                                   
Operating expenses                                  
Selling, general and administrative expenses     38,644       31,377     20,137     -     51,514  
Depreciation, depletion and amortization expense     59,204       36,744     12,088     5,971     54,803  
Asset impairments     -       12,300     -     -     12,300  
Restructuring and other charges     9,535         -       -     -     -  
Other operating expense (income), net     1,670       1,150     (1,563   -     (413 )
Operating income (loss) from continuing operations     (10,086 )     71,536     40,186     (5,971 )   105,751  
                                   
Interest expense, net     27,866       8,991     11,903     4,907     25,801  
Other non-operating expense, net     1,571       38,923     24,723     (63,646   -  
Income (loss) from continuing operations before provision (benefit) for income taxes     (39,523 )     23,622     3,560     52,768     79,950  
                                   
Provision (benefit) for income taxes     (5,136 )     6,454     872     11,063     18,389  
Net income (loss) from continuing operations     (34,387 )     17,168     2,688     41,705     61,561  
Less: Net income from continuing operations attributable to the non-controlling interest     7       106     -     -     106  
Net income (loss) from continuing operations attributable to Covia Holdings Corporation     (34,394 )     17,062     2,688     41,705     61,455  
                                   
Interest expense, net     27,866       8,991     11,903     4,907     25,801  
Provision (benefit) for income taxes     (5,136 )     6,454     872     11,063     18,389  
Depreciation, depletion and amortization expense     59,204       36,744     12,088     5,971     54,803  
EBITDA     47,540       69,251     27,551     63,646     160,448  
                                   
Non-cash charges relating to operating leases(4)     2,100       -     -     -     -  
Non-cash stock compensation expense(5)     3,316       793     5,063     -     5,856  
Costs and expenses related to the Merger and integration(6)     245       38,923     24,723     (63,646 )   -  
Restructuring and other charges(7)     12,124       -     -     -     -  
Asset impairments(8)     -       12,300     -     -     12,300  
Adjusted EBITDA   $ 65,325     $ 121,267   $ 57,337   $ -   $ 178,604  
                                   
    Six Months Ended June 30,  
    2019     2018  
    As Reported     As Reported   Fairmount Santrol Pre-Merger(3)   Merger Pro Forma Adjustments(1)   Pro Forma Combined(2)  
Revenues   $ 873,182     $ 878,239   $ 477,332   $ -   $ 1,355,571  
Cost of goods sold (excluding depreciation, depletion,                                  
and amortization shown separately)(4)     707,529       615,630     319,224     -     934,854  
                                   
Operating expenses                                  
Selling, general and administrative expenses     80,604       56,601     44,156     -     100,757  
Depreciation, depletion and amortization expense     117,299       63,875     29,313     1,587     94,775  
Asset impairments     -       12,300     -     -     12,300  
Restructuring and other charges     11,537       -     -     -     -  
Other operating expense (income), net     (4,722 )     1,663     (2,292 )   -     (629 )
Operating income (loss) from continuing operations     (39,065 )     128,170     86,931     (1,587 )   213,514  
                                   
Interest expense, net     53,002       13,669     25,686     8,799     48,154  
Loss on debt extinguishment and repurchase     -       -     -     -     -  
Other non-operating expense, net     3,758       44,223     28,057     (77,880 )   (5,600 )
Income (loss) from continuing operations before provision (benefit) for income taxes     (95,825 )     70,278     33,188     67,494     170,960  
                                   
Provision (benefit) for income taxes     (9,190 )     16,324     1,683     15,524     33,531  
Net income (loss) from continuing operations     (86,635 )     53,954     31,505     51,970     137,429  
Less: Net income from continuing operations attributable to the non-controlling interest     4       106     3     -     109  
Net income (loss) from continuing operations attributable to Covia Holdings Corporation     (86,639 )     53,848     31,502     51,970     137,320  
                                   
Interest expense, net     53,002       13,669     25,686     8,799     48,154  
Provision (benefit) for income taxes     (9,190 )     16,324     1,683     15,524     33,531  
Depreciation, depletion and amortization expense     117,299       63,875     29,313     1,587     94,775  
EBITDA     74,472       147,716     88,184     77,880     313,780  
                                   
Non-cash charges relating to operating leases(4)     4,200       -     -     -     -  
Non-cash stock compensation expense(5)     6,082       793     8,482     -     9,275  
Costs and expenses related to the Merger and integration(6)     896       44,223     28,057     (77,880 )   (5,600 )
Restructuring and other charges(7)     14,126       -     -     -     -  
Asset impairments(8)     -       12,300     -     -     12,300  
Adjusted EBITDA   $ 99,776     $ 205,032   $ 124,723   $ -   $ 329,755  
                                   
    Three Months Ended March 31,                            
    2019                            
    As Reported                            
Revenues   $ 428,246                            
Cost of goods sold (excluding depreciation, depletion,                                  
and amortization shown separately)(4)     361,560                            
                                   
Operating expenses                                  
Selling, general and administrative expenses     41,960                            
Depreciation, depletion and amortization expense     58,095                            
Goodwill and other asset impairments     -                            
Restructuring and other charges     2,002                            
Other operating expense (income), net     (6,392 )                          
Operating income (loss) from continuing operations     (28,979 )                          
                                   
Interest expense, net     25,136                            
Other non-operating expense, net     2,187                            
Income from continuing operations before provision for income taxes     (56,302 )                          
                                   
Provision (benefit) for income taxes     (4,054 )                          
Net income (loss) from continuing operations     (52,248 )                          
Less: Net income (loss) from continuing operations attributable to the non-controlling interest     (3 )                          
Net income (loss) from continuing operations attributable to Covia Holdings Corporation     (52,245 )                          
                                   
Interest expense, net     25,136                            
Provision (benefit) for income taxes     (4,054 )                          
Depreciation, depletion and amortization expense     58,095                            
EBITDA     26,932                            
                                   
Non-cash charges relating to operating leases(4)     2,100                            
Non-cash stock compensation expense(5)     2,767                            
Costs and expenses related to the Merger and integration(6)     651                            
Restructuring and other charges(7)     2,002                            
Adjusted EBITDA   $ 34,452                            
__________  
   
(1) The unaudited pro forma condensed financial information presents the Company’s combined results as if the Merger had occurred on January 1, 2017.  The pro forma financial information was prepared to give effect to events that are (i) directly attributable to the Merger; (ii) factually supportable; and (iii) expected to have a continuing impact on the Company’s results.  All material intercompany transactions during the periods presented have been eliminated.  These pro forma results include adjustments for interest expense that would have been incurred to finance the transaction and reflect purchase accounting adjustments for additional depreciation, depletion and amortization on acquired property, plant and equipment and intangible assets in prior periods which resulted in a reduction to depreciation, depletion and amortization in the current periods.  The pro forma results exclude Merger related transaction costs and expenses that were incurred in conjunction with the transaction for all periods presented.  
   
(2) The unaudited Covia Pro Forma Combined financial results include the aggregate results of operations for legacy Fairmount Santrol and legacy Unimin for periods preceding the June 1, 2018 merger.  
   
(3) 2018 Pre-Merger financial results are for Fairmount Santrol Holdings Inc. ("Fairmount Santrol"), for the two and five months ended May 31, 2018, the day before the merger between Fairmount Santrol and Unimin Corporation ("Unimin") occurred on June 1, 2018.  Such results are based on Fairmount Santrol's unaudited internal financial statements and have been prepared on a basis substantially consistent with Fairmount Santrol's prior audited financial statements, but have not been reviewed by the Company's independent auditors. Both Fairmount Santrol and Unimin reported financial results on a calendar fiscal year.  
   
(4) In the three and six months ended June 30, 2019, Energy segment gross profit was negatively impacted by the $2.1 million and $4.2 million, respectively, of operating lease expense incurred related to intangible assets that were reclassified to Operating right-of-use assets, net on the Condensed Consolidated Balance Sheets, as a result of the adoption of Topic 842.  The expense, previously recognized as non-cash amortization expense, is now recognized in Cost of goods sold (excluding depreciation, depletion, and amortization shown separately) on the Condensed Consolidated Statement of Income (Loss).  
   
(5) Represents the non-cash expense for stock-based awards issued to employees and outside directors.  Stock compensation expenses are reported in Selling, general & administrative expenses ("SG&A").  
   
(6) Costs and expenses related to the Merger with Fairmount Santrol include legal, accounting, financial advisory services, severance, debt extinguishment, and integration expenses.  
   
(7) Represents expenses associated with restructuring activities as a result of the Merger and idled plant facilities, including restructuring-related SG&A expenses.  
   
(8) Represents expenses from a terminated project in 2018 due to post-Merger synergies and capital optimization.  

 

Covia  
Pro Forma Segment Contribution Margin & Reconciliation to Most Directly Comparable GAAP Measures (unaudited)  
The following table reconciles segment contribution margin, a non-GAAP financial measure, to the most directly comparable GAAP measure, segment gross profit  
                             
    Three Months Ended June 30,  
    2019     2018  
    As Reported     Covia, As Reported   Fairmount Santrol Pre-Merger(1)   Covia Pro Forma Combined(2)  
Segment gross profit(3)                            
Energy   $ 33,858     $ 101,288   $ 60,553   $ 161,841  
Industrial     65,109       51,819     10,294     62,113  
Total segment gross profit     98,967       153,107     70,847       223,954  
                             
Operating expenses excluded from segment contribution margin(4)     7,054         2,102     4,203     6,305  
                             
Segment contribution margin (non-GAAP)(4)                            
Energy     40,912       103,390     64,756     168,146  
Industrial     65,109       51,819     10,294     62,113  
Total segment contribution margin (non-GAAP)   $ 106,021     $ 155,209   $ 75,050   $ 230,259  
                             
Segment contribution margin per ton (non-GAAP)(4)                            
Energy   $ 8.93     $ 24.19   $ 33.16   $ 27.00  
Industrial     18.11       15.49     21.90     16.28  
Total segment contribution margin per ton (non-GAAP)   $ 12.96     $ 20.37   $ 30.97   $ 22.93  
                             
    Six Months Ended June 30,  
    2019     2018  
    As Reported     Covia, As Reported   Fairmount Santrol Pre-Merger(1)   Covia Pro Forma Combined(2)  
Segment gross profit(3)                            
Energy   $ 48,922     $ 166,783   $ 136,668   $ 303,451  
Industrial     116,731       95,826     21,440     117,266  
Total segment gross profit     165,653       262,609     158,108     420,717  
                             
Operating expenses excluded from segment contribution margin (non-GAAP)(4)     14,009       2,102     10,726     12,828  
                             
Segment contribution margin (non-GAAP)(4)                            
Energy     62,931       168,885     147,394     316,279  
Industrial     116,731       95,826     21,440     117,266  
Total segment contribution margin (non-GAAP)   $ 179,662     $ 264,711   $ 168,834   $ 433,545  
                             
Segment contribution margin per ton (non-GAAP)(4)                            
Energy   $ 6.98     $ 23.29   $ 32.13   $ 26.72  
Industrial     16.30       15.17     20.46     15.92  
Total segment contribution margin per ton (non-GAAP)   $ 11.11     $ 19.51     $ 29.96   $ 22.58  
                             
    Three Months Ended March 31,                      
    2019                      
    As Reported                      
Segment gross profit(3)                            
Energy   $ 15,064                      
Industrial     51,622                      
Total segment gross profit     66,686                      
                             
Operating expenses excluded from segment contribution margin (non-GAAP)(4)     6,955                      
                             
Segment contribution margin (non-GAAP)(4)                            
Energy     22,019                      
Industrial     51,622                      
Total segment contribution margin (non-GAAP)   $ 73,641                      
                             
Segment contribution margin per ton (non-GAAP)(4)                            
Energy   $ 4.97                      
Industrial     14.48                      
Total segment contribution margin per ton (non-GAAP)   $ 9.21                      
__________  
   
(1) 2018 Pre-Merger financial results are for Fairmount Santrol Holdings Inc. ("Fairmount Santrol"), for the two and five months ended May 31, 2018, the day before the merger between Fairmount Santrol and Unimin Corporation ("Unimin") occurred on June 1, 2018.  Such results are based on Fairmount Santrol's unaudited internal financial statements and have been prepared on a basis substantially consistent with Fairmount Santrol's prior audited financial statements, but have not been reviewed by the Company's independent auditors. Both Fairmount Santrol and Unimin reported financial results on a calendar fiscal year.  
   
(2) The unaudited Covia Pro Forma Combined financial results include the aggregate results of operations for legacy Fairmount Santrol and legacy Unimin for periods preceding the June 1, 2018 merger.  
   
(3) In the three and six months ended June 30, 2019, Energy segment gross profit was negatively impacted by the $2.1 million and $4.2 million, respectively, of operating lease expense incurred related to intangible assets that were reclassified to Operating right-of-use assets, net on the Condensed Consolidated Balance Sheets, as a result of the adoption of Topic 842.  The expense, previously recognized as non-cash amortization expense, is now recognized in Cost of goods sold (excluding depreciation, depletion, and amortization shown separately) on the Condensed Consolidated Statement of Income (Loss).

As a result of the June 1, 2018 merger, legacy Fairmount Santrol inventories were written up to fair value under Generally Accepted Accounting Principles ("GAAP").  For the three and six months ended June 30, 2019, $0.2 million and $1.0 million, respectively, of this write-up was expensed through cost of goods sold, thereby reducing segment gross profit.  All of the $0.2 million for the three months ended June 30, 2019 impacted the Industrial segment.  Of the $1.0 million in the six months ended June 30, 2019, $0.4 million impacted the Energy segment and $0.6 million impacted the Industrial segment.
 
   
(4) We define segment contribution margin as segment revenue less segment cost of sales, excluding any depreciation, depletion and amortization expenses, selling, general, and administrative costs, and operating costs of idled facilities and excess railcar capacity.  Operating costs of idled facilities and excess railcar capacity costs, which are both entirely attributable to the Energy segment, were $7.1 million and $2.1 million in the three months ended June 30, 2019 and 2018, respectively, and $14.0 million and $2.1 million in the six months ended June 30, 2019 and 2018, respectively.  Segment contribution margin is a non-GAAP financial measure.  

Investor contact:
Matthew Schlarb
440-214-3284
Matthew.Schlarb@coviacorp.com 

Source: Covia

 

Covia_Color_RGB.jpg

Source: Covia Holdings Corporation

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