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Covia Announces Third Quarter 2019 Results

November 06, 2019
  • Sold volumes of 7.8 million tons, down 5% sequentially
  • Grew Industrial gross profit 4%, up 11% excluding the impact of asset sales
  • Reported net income from continuing operations of $54 million
  • Generated Adjusted EBITDA of $43 million

INDEPENDENCE, Ohio, Nov. 06, 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 third quarter ended September 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 third quarter, we made significant progress in reducing our financial leverage, including closing on $240 million in non-core asset sales, structurally removing costs and streamlining our organization,” said Richard Navarre, Chairman, President and Chief Executive Officer. “Industrial profitability increased year-over-year, despite the sale of two businesses and temporary end market-related challenges. Energy performed consistent with guidance through August; however, customers sharply curtailed completions activity in September, which negatively impacted our results. We have taken further actions to consolidate our production into lower-cost facilities and reduce costs across the organization.”

Mr. Navarre added, “Energy demand is expected to soften further in the fourth quarter, due to customer budget exhaustion and seasonality. In the face of these challenging conditions, we remain committed to repositioning our Energy business, organically growing our Industrial segment and strengthening our balance sheet. We are confident that these strategies will best position Covia to navigate market challenges and deliver strong profitability as market conditions improve.”   

Third Quarter 2019 Results

  • Total volumes decreased 5% sequentially to 7.8 million tons, and decreased 5% compared to the third quarter of 2018.
  • Total revenues decreased 8% sequentially to $409.0 million, and decreased 22% compared to the third quarter of 2018.
  • Selling, general and administrative expenses decreased 8% sequentially to $35.6 million, and decreased 17% compared to the third quarter of 2018.
      °  Third quarter 2019 selling, general and administrative expenses include $2.3 million in non-cash stock compensation expense. In the second quarter of 2019 and third quarter of 2018, non-cash stock compensation totaled $3.3 million and $2.7 million, respectively. 
  • Net income from continuing operations totaled $53.8 million, a sequential increase of $88.2 million. The increase was driven by the $127.2 million pre-tax gain on sale of assets.
  • Adjusted EBITDA of $43.2 million, compared to $65.3 million in the second quarter of 2019, and $84.1 million in the third quarter of 2018.

Third Quarter 2019 Segment Results

Industrial Segment Results

  • Volumes decreased 3% to 3.6 million tons compared to the third quarter of 2018, driven primarily by the sale of the Calera lime facility (“Calera’) and softness in the metals and foundry business, which was negatively impacted by the General Motors union strike. This was partially offset by strength in coatings and polymers, which increased 15%, and solid mid-single-digit growth in Mexican containerized glass. 
      °  Excluding Calera and the Winchester and Western Railroad (“W&W”), which were sold during the third quarter of 2019, volumes declined 1% compared to the third quarter of 2018.
  • Revenues decreased 7% to $185.6 million compared to the third quarter of 2018, driven primarily by lower transportation-related revenues. 
      °  Excluding Calera and W&W, revenues decreased 3% compared to the third quarter of 2018.
  • Segment gross profit and segment contribution margin of $59.1 million each increased $2.3 million, or 4%, from the third quarter of 2018, due mainly to increased pricing and cost improvements, partially offset by the sale of Calera and the W&W.
      °  Segment gross profit excluding Calera and W&W increased 11% compared to the third quarter of 2018.

Energy Segment Results

  • Volumes decreased 9% sequentially to 4.2 million tons.
  • Revenues decreased 11% sequentially to $223.3 million, driven primarily by lower volumes in September and moderately lower pricing for both Northern White and local sand.
  • Segment gross profit of $17.7 million compared to $33.9 million in the second quarter of 2019. Segment contribution margin of $24.6 million, a decrease of $16.3 million sequentially, driven primarily by lower pricing and lower fixed-cost absorption resulting from decreased volumes.
  • In response to lower market demand, the Company has reduced its annual effective Northern White capacity by approximately 5 million tons, including the idling of the Kasota, Minnesota facility, and the de-rating of capacity at several other facilities.

Balance Sheet and Liquidity

  • Total liquidity of $528.8 million as of September 30, 2019, which was composed of $340.1 million in cash and cash equivalents and $188.7 million of availability under the Company’s revolving credit facility.
  • Generated cash flow from operations of $17.4 million in the third quarter of 2019.
  • Third quarter 2019 capital expenditures totaled $15.6 million, primarily related to maintenance capital and the Canoitas plant expansion in Mexico to support customer growth.

Outlook

The Company’s fourth quarter 2019 expectations are:

  • Industrial volumes are expected to be in the range of 3.3 million tons to 3.5 million tons, which includes the negative impact from the sale of Calera.
  • Energy volumes are expected to decline at least 15% sequentially.

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.
  • 2019 capital expenditures are expected to be in the range of $85 million to $95 million.

The Company is actively implementing a Company-wide business optimization program to deliver a lower cost structure, support improved Industrial profitability, strengthen the balance sheet and create a more resilient and profitable Energy business.

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, segment contribution margin per ton, 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 segment contribution margin per ton 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 divided by tons sold.  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, merger-related expenses, restructuring charges 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 November 6, 2019, at 8:00 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 1880198. 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 1880198. The replay of the call will be available through November 13, 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 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
September 30,
    Nine Months Ended
September 30,
 
  2019     2018     2019     2018  
                       
  (in thousands, except per share amounts)     (in thousands, except per share amounts)  
Revenues $ 408,957     $ 523,368     $ 1,282,139     $ 1,401,607  
Cost of goods sold (excluding depreciation, depletion,                              
and amortization shown separately)   332,234       405,602       1,039,763       1,021,232  
                               
Operating expenses                              
Selling, general and administrative expenses(A)   35,628       43,164       116,232       99,765  
Depreciation, depletion and amortization expense   51,920       68,584       169,219       132,459  
Goodwill and other asset impairments   7,761       265,343       7,761       277,643  
Restructuring and other charges   3,378       14,750       14,915       14,750  
Gain on sale of subsidiaries   (127,195 )     -       (127,195 )     -  
Other operating expense (income), net   18       (974 )     (4,704 )     (330 )
Operating income (loss) from continuing operations   105,213       (273,101 )     66,148       (143,912 )
                               
Interest expense, net   26,894       23,530       79,896       35,325  
Other non-operating expense, net   1,924       9,043       5,682       56,159  
Income (loss) from continuing operations before provision (benefit) for income taxes   76,395       (305,674 )     (19,430 )     (235,396 )
                               
Provision (benefit) for income taxes   22,471       (16,848 )     13,281       (524 )
Net income (loss) from continuing operations   53,924       (288,826 )     (32,711 )     (234,872 )
Less: Net income (loss) from continuing operations attributable to the non-controlling interest   152       (32 )     156       74  
Net income (loss) from continuing operations attributable to Covia Holdings Corporation   53,772       (288,794 )     (32,867 )     (234,946 )
                               
Income from discontinued operations, net of tax   -       -       -       12,587  
                               
Net income (loss) attributable to Covia Holdings Corporation $ 53,772     $ (288,794 )   $ (32,867 )   $ (222,359 )
                               
Continuing operations earnings (loss) per share                              
Basic $ 0.41     $ (2.20 )   $ (0.25 )   $ (1.90 )
Diluted   0.41       (2.20 )     (0.25 )     (1.90 )
                               
Discontinued operations earnings per share                              
Basic   -       -       -       0.10  
Diluted   -       -       -       0.10  
                               
Earnings (loss) per share                              
Basic   0.41       (2.20 )     (0.25 )     (1.80 )
Diluted $ 0.41     $ (2.20 )   $ (0.25 )   $ (1.80 )
                               
Weighted average number of shares outstanding                              
Basic   131,562       131,154       131,437       123,604  
Diluted   131,745       131,154       131,437       123,604  
                               
(A) - Included within selling, general, and administrative expenses is stock compensation expense of $2.3 million and $2.7 million for the three months ended September 30, 2019 and 2018, respectively, and $8.4 million and $3.4 million for the nine months ended September 30, 2019 and 2018, respectively.  
   

 

               
Covia              
Condensed Consolidated Statements of Cash Flows              
(unaudited)              
  Nine Months Ended September 30,  
  2019     2018  
           
  (in thousands)  
Net loss attributable to Covia Holdings Corporation $ (32,867 )   $ (222,359 )
Adjustments to reconcile net loss to net cash provided by operating activities:              
Depreciation, depletion, and amortization   169,219       132,459  
Amortization of deferred financing costs   4,626       6,001  
Prepayment penalties on Senior Notes   -       2,213  
Goodwill and other asset impairments   7,761       277,643  
Inventory write-downs   -       6,744  
(Gain) loss on disposal of fixed assets   2,255       (90 )
Gain on sale of subsidiaries   (127,195 )     -  
Change in fair value of interest rate swaps, net   -       (2,658 )
Deferred income tax provision (benefit)   6,414       (9,234 )
Stock compensation expense   8,378       5,847  
Net income from non-controlling interest   156       74  
Other, net   5,037       11,101  
Change in operating assets and liabilities, net of business combination effect:              
Accounts receivable   13,303       53,533  
Inventories   19,768       10,511  
Prepaid expenses and other assets   6,078       (806 )
Accounts payable   (22,950 )     (32,628 )
Accrued expenses   8,812       (48,091 )
Net cash provided by operating activities   68,795       190,260  
               
Cash flows from investing activities              
Capital expenditures   (75,063 )     (188,424 )
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   (6,772 )     -  
Proceeds from sale of fixed assets   2,998       862  
Proceeds from sale of subsidiaries   234,014       -  
Net cash provided by (used in) investing activities   155,177       (283,259 )
               
Cash flows from financing activities              
Proceeds from borrowings on Term Loan   -       1,650,000  
Payments on Term Loan   (12,375 )     (4,125 )
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   (1,664 )     (35,574 )
Payments on finance lease liabilities   (3,460 )     -  
Fees for Revolver   -       (4,500 )
Cash Redemption payment to Sibelco   -       (520,377 )
Proceeds from share-based awards exercised or distributed   14       1  
Tax payments for withholdings on share-based awards exercised or distributed   (616 )     (289 )
Net cash used in financing activities   (18,101 )     (61,864 )
               
Effect of foreign currency exchange rate changes   125       2,211  
Increase (decrease) in cash and cash equivalents   205,996       (152,652 )
               
Cash and cash equivalents:              
Beginning of period   134,130       308,059  
End of period $ 340,126     $ 155,407  
 

 

               
Covia              
Condensed Consolidated Balance Sheets              
  (unaudited)     (audited)  
  September 30, 2019     December 31, 2018  
           
  (in thousands)  
Assets              
Current assets              
Cash and cash equivalents $ 340,126     $ 134,130  
Accounts receivable, net   247,440       267,268  
Inventories, net   139,061       162,970  
Other receivables   33,943       40,306  
Prepaid expenses and other current assets   20,174       20,941  
Assets held for sale   5,797       -  
Total current assets   786,541       625,615  
               
Property, plant and equipment, net   2,629,950       2,834,361  
Operating right-of-use assets, net   379,569       -  
Deferred tax assets, net   7,450       8,740  
Goodwill   119,822       131,655  
Intangibles, net   60,638       137,113  
Other non-current assets   30,256       18,633  
Total assets $ 4,014,226     $ 3,756,117  
               
Liabilities and Equity              
Current liabilities              
Current portion of long-term debt $ 14,509     $ 15,482  
Operating lease liabilities, current   65,880       -  
Accounts payable   97,124       145,070  
Accrued expenses   116,361       120,424  
Deferred revenue   13,111       9,737  
Total current liabilities   306,985       290,713  
               
Long-term debt   1,604,095       1,612,887  
Operating lease liabilities, non-current   282,843       -  
Employee benefit obligations   58,048       54,789  
Deferred tax liabilities, net   267,620       267,350  
Other non-current liabilities   73,878       75,425  
Total liabilities   2,593,469       2,301,164  
               
Equity              
Common stock   1,777       1,777  
Additional paid-in capital   386,600       388,027  
Retained earnings   1,615,092       1,647,959  
Accumulated other comprehensive loss   (105,102 )     (95,225 )
Treasury stock at cost   (478,322 )     (488,141 )
Non-controlling interest   712       556  
Total equity   1,420,757       1,454,953  
Total liabilities and equity $ 4,014,226     $ 3,756,117  
 

 

                           
Covia                          
Pro Forma Segment Information                      
(unaudited)                          
(in thousands)                          
  Three Months Ended September 30,  
  2019     2018  
  Covia, As Reported     Covia, As Reported      
Volumes (tons)                          
Energy   4,177       4,497      
Industrial   3,583       3,680      
Total volumes   7,760       8,177      
                           
Revenues                          
Energy $ 223,318     $ 324,606      
Industrial   185,639       198,762      
Total revenues   408,957       523,368      
                           
Segment gross profit(3)                          
Energy   17,662       60,961      
Industrial   59,061       56,805      
Total segment gross profit   76,723       117,766      
                           
Segment contribution margin (non-GAAP)(4)                          
Energy   24,576       67,913      
Industrial   59,061       56,805      
Total segment contribution margin (non-GAAP) $ 83,637     $ 124,718      
                           
Segment contribution margin per ton (non-GAAP)(4)                          
Energy $ 5.88     $ 15.10      
Industrial   16.48       15.44      
Total segment contribution margin per ton (non-GAAP) $ 10.78     $ 15.25      
                           
  Nine Months Ended September 30,  
  2019     2018  
  Covia, As Reported     Covia, As Reported   Fairmount Santrol Pre-Merger(1)   Covia Pro Forma Combined(2)  
Volumes (tons)                          
Energy   13,191       11,747     4,588     16,335  
Industrial   10,744       9,997     1,048     11,045  
Total volumes   23,935       21,744     5,636     27,380  
                           
Revenues                          
Energy $ 710,940     $ 858,813   $ 421,526   $ 1,280,339  
Industrial   571,199       542,794     55,805     598,599  
Total revenues   1,282,139       1,401,607     477,331     1,878,938  
                           
Segment gross profit(3)                          
Energy   66,584       227,744     136,668     364,412  
Industrial   175,792       152,631     21,440     174,071  
Total segment gross profit   242,376       380,375     158,108     538,483  
                           
Segment contribution margin (non-GAAP)(4)                          
Energy   87,507       236,798     147,394     384,192  
Industrial   175,792       152,631     21,440     174,071  
Total segment contribution margin (non-GAAP) $ 263,299     $ 389,429     168,834   $ 558,263  
                           
Segment contribution margin per ton (non-GAAP)(4)                          
Energy $ 6.63     $ 20.16   $ 32.13   $ 23.52  
Industrial   16.36       15.27     20.46     15.76  
Total segment contribution margin per ton (non-GAAP) $ 11.00     $ 17.91   $ 29.96   $ 20.39  
                           
  Three Months Ended June 30,                      
  2019                      
  Covia, As Reported                      
Volumes (tons)                          
Energy   4,582                      
Industrial   3,596                      
Total volumes   8,178                      
                           
Revenues                          
Energy $ 251,547                      
Industrial   193,389                      
Total revenues   444,936                      
                           
Segment gross profit(3)                          
Energy   33,858                      
Industrial   65,109                      
Total segment gross profit   98,967                      
                           
Segment contribution margin (non-GAAP)(4)                          
Energy   40,912                      
Industrial   65,109                      
Total segment contribution margin (non-GAAP) $ 106,021                      
                           
Segment contribution margin per ton (non-GAAP)(4)                          
Energy $ 8.93                      
Industrial   18.11                      
Total segment contribution margin per ton (non-GAAP) $ 12.96                      
__________  
   
(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 nine months ended September 30, 2019, Energy segment gross profit was negatively impacted by the $1.9 million and $6.1 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 ASC 842.  The expense, previously recognized as non-cash amortization expense, is now recognized in Cost of goods sold (excluding depreciation, depletion, and amortization shown separately) on the 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 nine months ended September 30, 2019, $1.1 million of this write-up was expensed through cost of goods sold, thereby reducing segment gross profit.  There was no write-up in the three months ended September 30, 2019.  Of the $1.1 million in the nine months ended September 30, 2019, $0.4 million impacted the Energy segment and $0.7 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 $6.9 million and $7.0 million in the three months ended September 30, 2019 and 2018, respectively, and $20.9 million and $9.1 million in the nine months ended September 30, 2019 and 2018, respectively.  Segment contribution margin and segment contribution margin per ton are non-GAAP financial measures.  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 of 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 September 30,  
  2019     2018  
  As Reported     As Reported   Fairmount Santrol Pre-Merger   Merger Pro Forma Adjustments(1)   Covia Pro Forma Combined(2)  
Revenues $ 408,957     $ 523,368     $ -   $ 523,368  
Cost of goods sold (excluding depreciation, depletion,                                
and amortization shown separately)(4)   332,234       405,602       -     405,602  
                                 
Operating expenses                                
Selling, general and administrative expenses   35,628       43,164       -     43,164  
Depreciation, depletion and amortization expense   51,920       68,584       (10,392 )   58,192  
Goodwill and other asset impairments   7,761       265,343       -     265,343  
Restructuring and other charges   3,378       14,750       -     14,750  
Gain on sale of subsidiaries   (127,195 )     -       -     -  
Other operating expense (income), net   18       (974 )     -     (974 )
Operating income (loss) from continuing operations   105,213       (273,101 )     10,392     (262,709 )
                                 
Interest expense, net   26,894       23,530       (372 )   23,158  
Other non-operating expense, net   1,924       9,043       (5,600 )   3,443  
Income (loss) from continuing operations before provision (benefit) for income taxes   76,395       (305,674 )     16,364     (289,310 )
                                 
Provision (benefit) for income taxes   22,471       (16,848 )     3,764     (13,084 )
Net income (loss) from continuing operations   53,924       (288,826 )     12,600     (276,226 )
Less: Net income (loss) from continuing operations attributable to the non-controlling interest   152       (32 )     -     (32 )
Net income (loss) from continuing operations attributable to Covia Holdings Corporation   53,772       (288,794 )     12,600     (276,194 )
                                 
Interest expense, net   26,894       23,530       (372 )   23,158  
Provision (benefit) for income taxes   22,471       (16,848 )     3,764     (13,084 )
Depreciation, depletion and amortization expense   51,920       68,584       (10,392 )   58,192  
EBITDA   155,057       (213,528 )     5,600     (207,928 )
                                 
Non-cash charges relating to operating leases(4)   1,856       -       -     -  
Non-cash stock compensation expense(5)   2,296       2,654       -     2,654  
Costs and expenses related to the Merger and integration(6)   -       5,600       (5,600 )   -  
Restructuring and other charges(7)   3,378       24,061       -     24,061  
Goodwill and asset impairments(8)   7,761       265,343       -     265,343  
Gain on sale of subsidiaries(9)   (127,195 )     -     -     -     -  
Adjusted EBITDA $ 43,153     $ 84,130     $ -   $ 84,130  
                                 
  Nine Months Ended September 30,  
  2019     2018  
  As Reported     As Reported   Fairmount Santrol Pre-Merger(3)   Merger Pro Forma Adjustments(1)   Pro Forma Combined(2)  
Revenues $ 1,282,139     $ 1,401,607   $ 477,332   $ -   $ 1,878,939  
Cost of goods sold (excluding depreciation, depletion,                                
and amortization shown separately)(4)   1,039,763       1,021,232     319,224     -     1,340,456  
                                 
Operating expenses                                
Selling, general and administrative expenses   116,232       99,765     44,156     -     143,921  
Depreciation, depletion and amortization expense   169,219       132,459     29,313     1,587     163,359  
Goodwill and other asset impairments   7,761       277,643     -     -     277,643  
Restructuring and other charges   14,915       14,750     -     -     14,750  
Gain on sale of subsidiaries   (127,195 )     -     -     -     -  
Other operating expense (income), net   (4,704 )     (330 )   (2,292 )   -     (2,622 )
Operating income (loss) from continuing operations   66,148       (143,912 )   86,931     (1,587 )   (58,568 )
                                 
Interest expense, net   79,896       35,325     25,686     8,799     69,810  
Other non-operating expense, net   5,682       56,159     28,057     (77,880 )   6,336  
Income (loss) from continuing operations before provision (benefit) for income taxes   (19,430 )     (235,396 )   33,188     67,494     (134,714 )
                                 
Provision (benefit) for income taxes   13,281       (524 )   1,683     15,524     16,683  
Net income (loss) from continuing operations   (32,711 )     (234,872 )   31,505     51,970     (151,397 )
Less: Net income (loss) from continuing operations attributable to the non-controlling interest   156       74     3     -     77  
Net income (loss) from continuing operations attributable to Covia Holdings Corporation   (32,867 )     (234,946 )   31,502     51,970     (151,474 )
                                 
Interest expense, net   79,896       35,325     25,686     8,799     69,810  
Provision (benefit) for income taxes   13,281       (524 )   1,683     15,524     16,683  
Depreciation, depletion and amortization expense   169,219       132,459     29,313     1,587     163,359  
EBITDA   229,529       (67,686 )   88,184     77,880     98,378  
                                 
Non-cash charges relating to operating leases(4)   6,056       -     -     -     -  
Non-cash stock compensation expense(5)   8,378       3,447     8,482     -     11,929  
Costs and expenses related to the Merger and integration(6)   896       49,823     28,057     (77,880 )   -  
Restructuring and other charges(7)   17,504       24,061     -     -     24,061  
Goodwill and other asset impairments(8)   7,761       277,643     -     -     277,643  
Gain on sale of subsidiaries(9)   (127,195 )     -     -     -     -  
Adjusted EBITDA $ 142,929     $ 287,288   $ 124,723   $ -   $ 412,011  
                                 
  Three Months Ended June 30,                            
  2019                            
  As Reported                            
Revenues $ 444,936                            
Cost of goods sold (excluding depreciation, depletion,                                
and amortization shown separately)(4)   345,969                            
                                 
Operating expenses                                
Selling, general and administrative expenses   38,644                            
Depreciation, depletion and amortization expense   59,204                            
Restructuring and other charges   9,535                            
Other operating expense (income), net   1,670                            
Operating income (loss) from continuing operations   (10,086 )                          
                                 
Interest expense, net   27,866                            
Other non-operating expense, net   1,571                            
Income from continuing operations before provision for income taxes   (39,523 )                          
                                 
Provision (benefit) for income taxes   (5,136 )                          
Net income (loss) from continuing operations   (34,387 )                          
Less: Net income (loss) from continuing operations attributable to the non-controlling interest   7                            
Net income (loss) from continuing operations attributable to Covia Holdings Corporation   (34,394 )                          
                                 
Interest expense, net   27,866                            
Provision (benefit) for income taxes   (5,136 )                          
Depreciation, depletion and amortization expense   59,204                            
EBITDA   47,540                            
                                 
Non-cash charges relating to operating leases(4)   2,100                            
Non-cash stock compensation expense(5)   3,316                            
Costs and expenses related to the Merger and integration(6)   245                            
Restructuring and other charges(7)   12,124                            
Adjusted EBITDA $ 65,325                            
__________  
   
(1) The unaudited Covia Pro Forma Combined 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.  The Merger Pro Forma Adjustments reflect adjustments for interest expense that would have been incurred to finance the transaction and 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 nine months ended September 30, 2019, Energy segment gross profit was negatively impacted by the $1.9 million and $6.1 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 ASC 842.  The expense, previously recognized as non-cash amortization expense, is now recognized in Cost of goods sold (excluding depreciation, depletion, and amortization shown separately) on the 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, other charges related to executive severance and benefits, as well as restructuring-related SG&A expenses.  
   
(8) Represents expenses from a terminated project in 2018 due to post-Merger synergies and capital optimization.  
   
(9) Represents the gain on the sales of Calera and W&W.  
   
 
 
Covia
Pro Forma Segment Contribution Margin & Reconciliation of Non-GAAP Measures (unaudited)
The following table reconciles segment contribution margin and segment contribution margin per ton, non-GAAP financial measures, to the most directly comparable GAAP measures, segment gross profit and segment gross profit per ton, respectively
                         
  Three Months Ended September 30,
  2019     2018
  As Reported     Covia, As Reported    
Segment gross profit(3)                        
Energy $ 17,662     $ 60,961    
Industrial   59,061       56,805    
Total segment gross profit   76,723       117,766    
                         
Operating expenses excluded from segment contribution margin(4)   6,914       6,952    
                         
Segment contribution margin (non-GAAP)(4)                        
Energy   24,576       67,913    
Industrial   59,061       56,805    
Total segment contribution margin (non-GAAP) $ 83,637     $ 124,718    
                         
Segment gross profit per ton(3)                        
Energy $ 4.23     $ 13.56    
Industrial   16.48       15.44    
Total segment gross profit per ton   9.89       14.40    
                         
Operating expenses per ton excluded from segment contribution margin per ton(4)   1.66       1.55    
                         
Segment contribution margin per ton (non-GAAP)(4)                        
Energy   5.88       15.10    
Industrial   16.48       15.44    
Total segment contribution margin per ton (non-GAAP) $ 10.78     $ 15.25    
                         
  Nine Months Ended September 30,
  2019     2018
  As Reported     Covia, As Reported   Fairmount Santrol Pre-Merger(1)   Covia Pro Forma Combined(2)
Segment gross profit(3)                        
Energy $ 66,584     $ 227,744   $ 136,668   $ 364,412
Industrial   175,792       152,631     21,440     174,071
Total segment gross profit   242,376       380,375     158,108     538,483
                         
Operating expenses excluded from segment contribution margin (non-GAAP)(4)   20,923       9,054     10,726     19,780
                         
Segment contribution margin (non-GAAP)(4)                        
Energy   87,507       236,798     147,394     384,192
Industrial   175,792       152,631     21,440     174,071
Total segment contribution margin (non-GAAP) $ 263,299     $ 389,429   $ 168,834   $ 558,263
                         
Segment gross profit per ton(3)                        
Energy $ 5.05     $ 19.39   $ 29.79   $ 22.31
Industrial   16.36       15.27     20.46     15.76
Total segment gross profit per ton   10.13       17.49     28.05     19.67
                         
Operating expenses per ton excluded from segment contribution margin per ton(4)   1.59       0.77     2.34     1.21
                         
Segment contribution margin per ton (non-GAAP)(4)                        
Energy   6.63       20.16     32.13     23.52
Industrial   16.36       15.27     20.46     15.76
Total segment contribution margin per ton (non-GAAP) $ 11.00     $ 17.91   $ 29.96   $ 20.39
                         
  Three Months Ended June 30,                    
  2019                    
  As Reported                    
Segment gross profit(3)                        
Energy $ 33,858                    
Industrial   65,109                    
Total segment gross profit   98,967                    
                         
Operating expenses excluded from segment contribution margin (non-GAAP)(4)   7,054                    
                         
Segment contribution margin (non-GAAP)(4)                        
Energy   40,912                    
Industrial   65,109                    
Total segment contribution margin (non-GAAP) $ 106,021                    
                         
Segment gross profit per ton(3)                        
Energy $ 7.39                    
Industrial   18.11                    
Total segment gross profit per ton   12.10                    
                         
Operating expenses per ton excluded from segment contribution margin per ton(4)   1.54                    
                         
Segment contribution margin per ton (non-GAAP)(4)                        
Energy   8.93                    
Industrial   18.11                    
Total segment contribution margin per ton (non-GAAP) $ 12.96                    
__________
 
(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 nine months ended September 30, 2019, Energy segment gross profit was negatively impacted by the $1.9 million and $6.1 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 ASC 842.  The expense, previously recognized as non-cash amortization expense, is now recognized in Cost of goods sold (excluding depreciation, depletion, and amortization shown separately) on the 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 nine months ended September 30, 2019, $1.1 million, respectively, of this write-up was expensed through cost of goods sold, thereby reducing segment gross profit.  There was no write-up in the three months ended September 30, 2019.  Of the $1.1 million in the nine months ended September 30, 2019, $0.4 million impacted the Energy segment and $0.7 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.  We define segment contribution margin as segment revenue less segment cost of sales, excluding any depreciation, depletion, and amortization expenses, selling, general, and administrative costs, and operating costs of idled facilities and excess railcar capacity.  Segment contribution margin per ton is defined as segment contribution margin divided by tons sold.  Operating costs of idled facilities and excess railcar capacity costs, which are both entirely attributable to the Energy segment, were $6.9 million and $7.0 million in the three months ended September 30, 2019 and 2018, respectively, and $20.9 million and $9.1 million in the nine months ended September 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.
 
 
   
Covia  
Adjusted Industrial Segment Information  
The following table provides unaudited adjusted Industrial segment data, excluding the impact of Calera and the Winchester & Western Railroad W&W, as well as freight revenues.  Calera and W&W were sold in August and September 2019, respectively.  Amounts in thousands.  
               
  Three Months Ended September 30,  
  2019     2018  
Industrial volumes (tons), as reported   3,583       3,680  
Less Calera volumes   (35 )     (100 )
Adjusted Industrial volumes   3,548       3,580  
               
Industrial revenues, as reported $ 185,639     $ 198,762  
Less Calera revenues   (4,591 )     (12,232 )
Less W&W revenues   (2,659 )     (3,333 )
Adjusted Industrial revenues $ 178,389     $ 183,197  
               
Industrial segment gross profit, as reported $ 59,061     $ 56,805  
Less Calera gross profit   (1,321 )     (4,130 )
Less W&W gross profit   (960 )     (1,485 )
Adjusted Industrial segment gross profit $ 56,780     $ 51,190  
 
 

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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