The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1.Business and Summary of Significant Accounting Policies
Nature of Operations
Covia Holdings Corporation, including its consolidated subsidiaries (collectively, “we,” “us,” “our,” “Covia,” and “Company”), is a leading provider of diversified mineral-based and material solutions for the Industrial and Energy markets. We provide a wide range of specialized silica sand, nepheline syenite, feldspar, calcium carbonate, clay, and kaolin products for use in the glass, ceramics, coatings, foundry, polymers, construction, water filtration, sports and recreation, and oil and gas markets in North America and around the world. Our Industrial segment provides raw, value-added and custom-blended products to the glass, ceramics, metals, coatings, polymers, construction, foundry, filtration, sports and recreation and various other industries, primarily in North America. Our Energy segment offers the oil and gas industry a comprehensive portfolio of raw frac sand, value-added-proppants, well-cementing additives, gravel-packing media and drilling mud additives. Our products serve hydraulic fracturing operations in the U.S., Canada, Argentina, Mexico, China, and northern Europe.
Covia began operating in its current form following a business combination between Fairmount Santrol Holdings Inc. (“Fairmount Santrol”) and Unimin Corporation (“Unimin”) pursuant to which Fairmount Santrol was merged into a wholly-owned subsidiary of Unimin, Bison Merger Sub, LLC (“Merger Sub”), with Merger Sub as the surviving entity following the merger (the “Merger”). The Merger was completed on June 1, 2018 (the “Merger Date”), after which Unimin changed its name to Covia Holdings Corporation.
Reclassifications
Certain reclassifications of prior period presentations have been made to conform to the current period presentation.
Basis of Presentation
Our unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, the unaudited condensed consolidated financial statements reflect all adjustments (which are of a normal, recurring nature) and disclosures necessary for a fair statement of the financial position, results of operations, comprehensive loss, and cash flows of the reported interim periods. The Condensed Consolidated Balance Sheet as of December 31, 2019 was derived from audited consolidated financial statements, but does not include all disclosures required by GAAP. Interim results are not necessarily indicative of the results to be expected for the full year or any other interim period. These unaudited condensed consolidated financial statements should be read in conjunction with our consolidated financial statements and notes thereto and for each of the three years in the period ended December 31, 2019, which are included in our Annual Report on Form 10-K, as filed with the Securities and Exchange Commission (“SEC” or the “Commission”) on March 16, 2020 (“Form 10-K”), and information included elsewhere in this Quarterly Report on Form 10-Q (“Report”).
Going Concern
The Company’s financial statements have been prepared under the assumption that it will continue as a going concern, which contemplates continuity of operations, realization of assets, and satisfaction of liabilities in the normal course of business. In connection with the preparation of our condensed consolidated financial statements, we conducted an evaluation as to whether there were conditions and events, considered in the aggregate, that raised substantial doubt as to the Company’s ability to continue as a going concern.
9
Covia Holdings Corporation and Subsidiaries
(Debtor-in-Possession)
Notes to Condensed Consolidated Financial Statements
(Unaudited)
On June 29, 2020 (“Petition Date”), Covia Holdings Corporation and certain of its direct and indirect U.S. subsidiaries filed petitions for reorganization under Chapter 11 of title 11 of the Bankruptcy Code, and in connection therewith, entered into a Restructuring Support Agreement (as defined below) as part of a prearranged plan of reorganization (see further description below).
In light of the Company’s Chapter 11 proceedings, our ability to continue as a going concern is contingent upon, among other things, our ability to, subject to the approval by the Bankruptcy Court (as defined below), implement a business plan of reorganization, emerge from the Chapter 11 proceedings and generate sufficient liquidity following the reorganization to meet our contractual obligations and operating needs. The Chapter 11 proceedings create certain risks and uncertainties related to, among other things, (i) the Company’s ability to obtain requisite support for the business plan of reorganization from various stakeholders, and (ii) the disruptive effects of the Chapter 11 proceedings on our business making it potentially more difficult to maintain business, financing and operational relationships.
Although management believes that the reorganization of the Company through the Chapter 11 Cases (as defined below) will position the Company for sustainable growth opportunities, the Chapter 11 filing caused an event of default under certain instruments governing the Company’s indebtedness, which is stayed during the pendency of the Company’s bankruptcy proceeding. Further, there are several risks and uncertainties associated with the Company’s bankruptcy, including, among others: (a) the Company’s prearranged plan of reorganization may never be confirmed or become effective, (b) the Restructuring Support Agreement (as defined below) may be terminated by one or more of the parties thereto, (c) the Bankruptcy Court may grant or deny motions in a manner that is adverse to the Company and its subsidiaries, and (d) the Company’s Chapter 11 Cases may be converted into a Chapter 7 liquidation. These factors, together with the Company’s recurring losses and accumulated deficit, create substantial doubt regarding our ability to continue as a going concern. See those risk factors discussed under “Risk Factors” in Part II, Item 1A of this Report.
Voluntary Reorganization under Chapter 11
On June 29, 2020, Covia Holdings Corporation and certain of its direct and indirect U.S. subsidiaries (collectively, the “Company Parties”) filed voluntary petitions for relief (the “Chapter 11 Cases”) under chapter 11 of title 11 of the United States Code (the “Bankruptcy Code”) with the Bankruptcy Court for the Southern District of Texas, Houston Division (the “Bankruptcy Court”). The Chapter 11 Cases are being jointly administered under the caption In re: Covia Holdings Corporation, et al.
The Company Parties continue to operate their businesses as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court. As discussed further below, to ensure ordinary course operations, the Company Parties obtained approval from the Bankruptcy Court for certain “first day” motions, including motions to obtain customary relief intended to continue ordinary course operations after the Petition Date.
However, the Chapter 11 process can be unpredictable and involves significant risks and uncertainties. As a result of these risks and uncertainties, the amount and composition of the Company’s assets, liabilities, officers and/or directors could be significantly different following the outcome of the Chapter 11 cases, and the description of the Company’s operations, properties and liquidity and capital resources included in this Report may not accurately reflect its operations, properties and liquidity and capital resources following the Chapter 11 process.
On June 29, 2020, and in connection with the filing of the Chapter 11 Cases, the Company Parties entered into a Restructuring Support Agreement (as amended, the “Restructuring Support Agreement”) with certain creditors (the “Consenting Stakeholders”) under its Credit and Guaranty Agreement, dated as of June 1, 2018 (as amended or otherwise modified from time to time, the “Term Loan Agreement”), by and among the Company, as borrower, certain subsidiaries of the Company, as guarantors, Barclays Bank plc, as administrative agent, and the lenders party thereto from time to time (the “Term Loan Lenders”). The Restructuring Support Agreement contemplates agreed-upon terms for a prearranged plan of reorganization (the “Plan”).
Under the Restructuring Support Agreement, the Plan must be confirmed and declared effective by the Bankruptcy Court no later than 150 days after the Petition Date. Under the Bankruptcy Code, a majority in number and two-thirds in amount of each impaired class of claims must approve the Plan. The Restructuring Support Agreement requires the Consenting Stakeholders to vote in favor of and support the Plan, and the Consenting Stakeholders represent the requisite number of votes for the Term Loan Agreement’s class of creditors entitled to vote on the Plan.
10
Covia Holdings Corporation and Subsidiaries
(Debtor-in-Possession)
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The Plan is expected to be implemented in accordance with the restructuring term sheet attached to, and incorporated into, the Restructuring Support Agreement (the “Term Sheet”) (such transactions described in, and in accordance with the Restructuring Support Agreement and the Term Sheet, the “Restructuring Transactions”) which, among other things, contemplates that:
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the Restructuring Transactions are to be implemented through the prearranged Chapter 11 Cases by the Company Parties to pursue confirmation of the Plan, on which votes will be solicited from (i) the Term Loan Lenders and holders of claims under certain interest rate swap agreements to which the Company is a party (such claims, “Swap Agreement Claims”) and (ii) certain holders of general unsecured claims;
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•
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the Receivables Facility is to be terminated and replaced with a letter of credit facility (the “L/C Facility”) pursuant to an interim order of the Bankruptcy Court authorizing, among other things (i) the Company’s funding of a new letter of credit collateral account held at Covia Financing, (ii) entry into the Payoff and Reassignment Agreement (the “Payoff Agreement”), among the Company, Covia Financing, the sub-originators party thereto (the “RSA Sub-Originators”), PNC, and PNC Capital Markets LLC (“PNC Capital”), (iii) the Company’s and the RSA Sub-Originators’ entry into, and performance of, their respective obligations under the Payoff Agreement and, as applicable, the Reimbursement Agreement for Cash-Collateralized Standby Letters of Credit, among PNC, Covia Financing, and the Company (the “Reimbursement Agreement” and, together with the Payoff Agreement, the “Letter of Credit Agreements”), and (iv) execution of the transactions contemplated by the Letter of Credit Agreements (see below and Note 25 for further detail on the termination of the Receivables Facility);
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•
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on the effective date of the Plan, the reorganized Company Parties expect to enter into a $825 million senior secured term loan (the “New Term Loan”) with an interest rate of LIBOR + 400 bps (100 bps floor), payable in cash unless the Company elects a PIK and cash option, a minimum liquidity covenant of $50 million to be tested quarterly, and on other terms reasonably acceptable to the Company and the Consenting Stakeholders as set forth in a supplement to the Plan;
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•
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on the effective date of the Plan, the reorganized Company Parties may enter into at least a $100 million senior secured revolving credit facility (the “Exit Facility”) on terms reasonably acceptable to the Company and the Consenting Stakeholders, with the terms of the Exit Facility being set forth in a supplement to the Plan and sufficient to replace the Company Parties’ existing letters of credit and fund their ongoing liquidity;
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the Term Loan Lenders and holders of Swap Agreement Claims are expected to receive, in exchange for their claims under the Term Loan Agreement (the “Term Loan Claims”) and Swap Agreement Claims, respectively, their pro rata share of (i) all excess cash on the Company’s balance sheet pro forma for all remaining professional fees expected to be paid through the date upon which the Company emerges from bankruptcy (the “Emergence Date”) as of the date of the last available month-end balance sheet as of ten business days prior to the Emergence Date as of the effective date of the Plan, subject to minimum liquidity and cash requirements and working capital adjustments, net of any proceeds associated with receipt of the CARES Act Tax Refund; (ii) $825 million in take-back debt pursuant to the New Term Loan; and (iii) 100% of the equity in the reorganized Company, subject to adjustment for treatment of general unsecured claims and dilution from a new management incentive plan of the reorganized Company (the “MIP”);
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•
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the holders of claims under an industrial revenue bond issued by the Company and certain other secured debt of the Company (such claims, the “Other Secured Claims”) will have such claims reinstated;
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•
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the holders of general unsecured claims will receive their pro rata share of a to be determined portion of the equity in the reorganized Company, subject to dilution from the MIP; and
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•
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on the effective date of the Plan, (i) the Term Loan Claims, Swap Agreement Claims, general unsecured claims, and existing equity interests of the Company will be cancelled, released, and extinguished and will be of no further force and effect, (ii) the L/C Facility may be reinstated (or refinanced with the Exit Facility), and (iii) the Other Secured Claims will be reinstated.
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11
Covia Holdings Corporation and Subsidiaries
(Debtor-in-Possession)
Notes to Condensed Consolidated Financial Statements
(Unaudited)
In accordance with the Restructuring Support Agreement, the Consenting Stakeholders agreed, among other things, to: (i) support the Restructuring Transactions and vote and exercise any powers or rights available to it (including in any board, shareholders’, or creditors’ meeting or in any process requiring voting or approval to which they are legally entitled to participate), in each case, in favor of any matter requiring approval to the extent necessary to implement the Restructuring Transactions; (ii) use commercially reasonable efforts to cooperate with and assist the Company Parties in obtaining additional support for the Restructuring Transactions from the Company Parties’ other stakeholders; (iii) vote and consent to accept the Plan; (iv) negotiate in good faith and use commercially reasonable efforts to execute and implement the Definitive Documents and any other required agreements to effectuate and consummate the Restructuring Transactions as contemplated by this Restructuring Support Agreement to which it is required to be a party; (v) not to object to, delay, impede, or take any other action to interfere with acceptance, implementation, or consummation of the Restructuring Transactions; and (vi) except as permitted in the Restructuring Support Agreement, not transfer any ownership (including any beneficial ownership as defined in Rule 13d-3 under the Securities Exchange Act of 1934, as amended) held by each Consenting Stakeholder.
In accordance with the Restructuring Support Agreement, the Company Parties agreed, among other things, to: (i) support and take all steps necessary and desirable to consummate the Restructuring Transactions in accordance with the Restructuring Support Agreement; (ii) not take any action, that is inconsistent in any material respect, or that would reasonably be expected to prevent, interfere with, delay, frustrate or impede approval, implementation and consummation of the Restructuring Transactions; (iii) to the extent any legal or structural impediment arises that would prevent, hinder, or delay the consummation of the Restructuring Transactions contemplated in the Restructuring Support Agreement or the Plan, support and take all steps reasonably necessary and desirable to address any such impediment; (iv) use commercially reasonable efforts to obtain any and all required governmental, regulatory and/or third-party approvals for the Restructuring Transactions; (v) negotiate in good faith and execute and deliver the Definitive Documents and any other required agreements to effectuate and consummate the Restructuring Transactions as contemplated by this Restructuring Support Agreement; and (vi) use commercially reasonable efforts to seek additional support for the Restructuring Transactions from their other material stakeholders to the extent reasonably prudent.
The Restructuring Support Agreement may be terminated upon the occurrence of certain events set forth therein, including, among other things, the failure to meet specified milestones specified in the Restructuring Term Sheet.
To implement the Plan, on June 29, 2020, the Company Parties filed the Chapter 11 Cases.
Further, with the approval of the Bankruptcy Court, the Receivables Facility was replaced with a letter of credit facility pursuant to an interim order of the Bankruptcy Court authorizing, among other things, (i) the Company’s funding of a new letter of credit collateral account held at Covia Financing, (ii) entry into the Payoff and Reassignment Agreement (the “Payoff Agreement”), among the Company, Covia Financing, the Sub-Originators, PNC, and PNC Capital, (iii) the Company’s, Covia Financing’s and the Sub-Originators’ entry into, and performance of, their respective obligations under the Payoff Agreement and, as applicable, the Reimbursement Agreement for Cash-Collateralized Standby Letters of Credit, among PNC, Covia Financing, and the Company (the “Reimbursement Agreement” and, together with the Payoff Agreement, the “Letter of Credit Agreements”), and (iv) execution of the transactions contemplated by the Letter of Credit Agreements. In July 2020, we cash collateralized our $37.0 million of outstanding standby letters of credit. See Note 25 for further detail on the Receivables Facility.
Further, the commencement of the Chapter 11 Cases constituted an event of default under, and resulted in the acceleration of, certain of the Company Parties’ debt obligations, including under the following debt instruments (the “Debt Instruments”):
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$1.56 billion in aggregate principal amount under the Term Loan Agreement;
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$37.0 million in principal amount, including reimbursement obligations in respect of letters of credit, plus accrued and unpaid interest (at the non-default rate), fees, and other expenses arising and payable under the Receivables Facility;
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Approximately $35.8 million in obligations under five separate interest rate swap transactions that were entered into pursuant to either (i) that certain 2002 ISDA Master Agreement, dated as of May 30, 2018, by and between BNP Paribas and the Company, as successor in interest to Unimin Corporation, or (ii) that certain 1992 ISDA Master Agreement, dated as of June 28, 2018, by and between Barclays Bank PLC and the Company; and
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Approximately $10.0 million in aggregate principal amount of other indebtedness, consisting of an industrial revenue bond.
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12
Covia Holdings Corporation and Subsidiaries
(Debtor-in-Possession)
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The Debt Instruments provide that as a result of the Chapter 11 Cases, the principal and interest due thereunder shall be immediately due and payable. The Company Parties believe that any efforts to enforce the financial obligations under the Debt Instruments are stayed as a result of the filing of the Chapter 11 Cases in the Bankruptcy Court.
The Company cannot predict the ultimate outcome of the Chapter 11 Cases. Although the Company expects the Chapter 11 Cases to proceed in accordance with the milestones set forth in the Restructuring Support Agreement, third parties may propose alternative plans of reorganization. Further, the Restructuring Support Agreement may be terminated upon the occurrence of certain events set forth in the Definitive Documents (as defined in the Restructuring Support Agreement), including the failure to meet specified milestones specified in the Restructuring Term Sheet. In the event the Plan is not confirmed or the Restructuring Support Agreement is terminated, the duration of the Chapter 11 Cases will be extended which will increase the Company’s expenses and reduce the Company’s capital resources. Further, even if the Plan is confirmed, although the Company expects the exit financing provided for in the Plan will be sufficient to make all payments required by the Plan, the Company faces many risks and uncertainties that it cannot predict and consequently, there is no guarantee that the exit financing provided for in the Plan will be sufficient to accomplish the Company’s reorganization strategy. See “Risk Factors” in Part II, Item 1A of this Report for additional information.
NYSE Notice of Delisting Proceedings
On June 30, 2020, the Company was notified by the staff of NYSE Regulation, Inc. (“NYSE Regulation”) that it had determined to commence proceedings to delist the Company’s common stock from the New York Stock Exchange (“NYSE”). NYSE Regulation reached its decision that the Company is no longer suitable for listing pursuant to NYSE Listed Company Manual Section 802.01D after the Company commenced the Chapter 11 Cases. See Note 25 for further detail on the delisting proceedings.
Bankruptcy Accounting
For the periods following the Petition Date, the Company has applied Accounting Standards Codification 852 - Reorganizations (“ASC 852”) in preparing the consolidated financial statements. ASC 852 requires the financial statements, for periods subsequent to the commencement of the Chapter 11 Cases, to distinguish transactions and events that are directly associated with the reorganization from the ongoing operations of the business. Accordingly, certain charges incurred during the three months ended June 30, 2020 related to the bankruptcy proceedings, including unamortized long-term debt issuance costs associated with debt classified as liabilities subject to compromise, are recorded as “Reorganization items, net.” In addition, the Company Parties’ pre-petition obligations that may be impacted by the Chapter 11 Cases have been classified on the Condensed Consolidated Balance Sheets at June 30, 2020 as “Liabilities subject to compromise.” These liabilities are reported at the amounts the Company anticipates will be allowed by the Bankruptcy Court, even if they may be settled for lesser amounts. See below for more information regarding Reorganization items.
ASC 852 requires certain additional reporting for financial statements prepared between the bankruptcy filing date and the date of emergence from bankruptcy, including:
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Reclassification of Company Parties pre-petition liabilities that are unsecured, under-secured or where it cannot be determined that the liabilities are fully secured, to a separate line item in the Condensed Consolidated Balance Sheets called, “Liabilities subject to compromise”; and
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Segregation of “Reorganization items, net” as a separate line in the Condensed Consolidated Statements of Loss, outside of loss from operations.
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13
Covia Holdings Corporation and Subsidiaries
(Debtor-in-Possession)
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Debtor-In-Possession
The Company Parties are currently operating as debtors-in-possession in accordance with the applicable provisions of the Bankruptcy Code. The Bankruptcy Court has approved motions filed by the Company Parties that were designed primarily to mitigate the impact of the Chapter 11 Cases on the Company’s operations, customers and employees. In general, as debtors-in-possession under the Bankruptcy Code, the Company Parties are authorized to continue to operate as an ongoing business, but may not engage in transactions outside the ordinary course of business without the prior approval of the Bankruptcy Court. Pursuant to first day motions filed with the Bankruptcy Court, the Bankruptcy Court authorized the Company Parties to conduct their business activities in the ordinary course, including, among other things and subject to the terms and conditions of such orders, authorizing the Company Parties to: (i) pay employees’ wages and related obligations; (ii) continue to operate their cash management system in a form substantially similar to pre-petition practice; (iii) use cash collateral on an interim basis; (iv) pay taxes in the ordinary course; and (v) maintain their insurance program in the ordinary course.
Automatic Stay
Subject to certain specific exceptions under the Bankruptcy Code, the filing of the petitions for the Chapter 11 Cases on the Petition Date automatically stayed most judicial or administrative actions against the Company Parties and efforts by creditors to collect on or otherwise exercise rights or remedies with respect to pre-petition claims. Absent an order from the Bankruptcy Court, substantially all of the Company Parties’ pre-petition liabilities are subject to settlement under the Bankruptcy Code. See Note 24, Condensed Combined Debtor-In-Possession Financial Information for additional information.
Executory Contracts
Subject to certain exceptions, under the Bankruptcy Code, the Company Parties may assume, amend or reject certain executory contracts and unexpired leases subject to the approval of the Bankruptcy Court and certain other conditions. Generally, the rejection of an executory contract or unexpired lease is treated as a pre-petition breach of such executory contract or unexpired lease and, subject to certain exceptions, relieves the Company Parties from performing their future obligations under such executory contract or unexpired lease but entitles the contract counterparty or lessor to a pre-petition general unsecured claim for damages caused by such deemed breach. Generally, the assumption of an executory contract or unexpired lease requires the Company Parties to cure existing monetary defaults under such executory contract or unexpired lease and provide adequate assurance of future performance. Accordingly, any description of an executory contract or unexpired lease with the Company Parties in this document, including where applicable a quantification of the Company’s obligations under any such executory contract or unexpired lease of the Company Parties, is qualified by any overriding rejection rights the Company has under the Bankruptcy Code.
Potential Claims
The Company Parties expect to file schedules and statements (the “Schedules and Statements”) and reports required under Federal Rule of Bankruptcy Procedure 2015.3 (the “2015.3 Reports”) on August 12, 2020, and August 13, 2020, respectively. The Schedules and Statements set forth, among other things, the assets and liabilities of each of the Company Parties, subject to the assumptions filed in connection therewith. The 2015.3 Reports set forth, among other things, financial information of entities in which a chapter 11 estate holds a controlling or substantial interest. The Schedules and Statements and 2015.3 Reports may be subject to further amendment or modification after filing.
The Bankruptcy Court entered an order on August 3, 2020, setting claim bar dates for certain types of claims. Certain holders of pre-petition claims that are not governmental units are required to file proofs of claim by September 18, 2020 (the “Bar Date”). These claims will be reconciled to amounts recorded in the Company's accounting records. Differences in amounts recorded and claims filed by creditors will be investigated and resolved, including through the filing of objections with the Bankruptcy Court, where appropriate. The Company may ask the Bankruptcy Court to disallow claims that the Company believes are duplicative, have been later amended or superseded, are without merit, are overstated or should be disallowed for other reasons. In addition, as a result of this process, the Company may identify additional liabilities that will need to be recorded or reclassified to Liabilities subject to compromise. In light of the substantial number of claims expected to be filed, the claims resolution process may take considerable time to complete and likely will continue after the Company Parties emerge from bankruptcy.
14
Covia Holdings Corporation and Subsidiaries
(Debtor-in-Possession)
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Reorganization Items, Net
The Company Parties have incurred and will continue to incur significant costs associated with the reorganization, primarily legal, investment banking, financial advisory and other professional fees as well as the write-off of deferred long-term debt fees on debt subject to compromise. The amount of these costs, which since the Petition Date are being expensed as incurred, are expected to significantly affect the Company’s results of operations. Professional fees incurred prior to the Petition Date but related to the bankruptcy filing have been recorded as Restructuring and Other Charges on the Income Statement. In accordance with applicable guidance, costs associated with the bankruptcy proceedings subsequent to the Petition Date have been recorded as Reorganization items, net within the Company’s accompanying Condensed Consolidated Statement of Loss for the three months ended June 30, 2020. See Note 23, Reorganization Items, Net.
Financial Statement Classification of Liabilities Subject to Compromise
The accompanying Condensed Consolidated Balance Sheets as of June 30, 2020 includes amounts classified as “Liabilities subject to compromise,” which represent liabilities the Company anticipates will be allowed as claims in the Chapter 11 Cases. These amounts represent the Company Parties’ current estimate of known or potential obligations to be resolved in connection with the Chapter 11 Cases, and may differ from actual future settlement amounts paid. Differences between liabilities estimated and claims filed, or to be filed, will be investigated and resolved in connection with the claims resolution process. The Company will continue to evaluate these liabilities throughout the Chapter 11 process and adjust amounts as necessary. Such adjustments may be material. See Note 22, Liabilities Subject to Compromise.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. The more significant areas requiring the use of management estimates and assumptions relate to: the useful life of definite-lived intangible assets; asset retirement obligations; estimates of allowance for doubtful accounts; estimates of fair value for reporting units and asset impairments (including impairments of goodwill and other long-lived assets); adjustments of inventories to net realizable value; post-employment, post-retirement and other employee benefit liabilities; valuation allowances for deferred tax assets; and reserves for contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, including the use of valuation experts. Accordingly, actual results may differ significantly from these estimates under different assumptions or conditions.
Recent Accounting Pronouncements
Recently Adopted Accounting Pronouncements
Allowance for Doubtful Accounts
On January 1, 2020, we adopted ASU No. 2016-13 – Financial Instruments – Credit Losses (Topic 326) (“ASU 2016-13”). ASU 2016-13 replaced the incurred loss impairment methodology with a methodology that applies a forward-looking “expected loss” model to receivables, loans and other instruments. The adoption did not have a material impact on our condensed consolidated financial statements and disclosures. The allowance for doubtful accounts at December 31, 2019 was $2.2 million. For the three and six months ended June 30, 2020 we recorded $2.5 million and $2.7 million, respectively, of bad debt expense and had a balance in allowance for doubtful accounts at June 30, 2020 of $4.6 million.
15
Covia Holdings Corporation and Subsidiaries
(Debtor-in-Possession)
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Income Taxes
In December 2019, the FASB issued ASU No. 2019-12 – Income Taxes (Topic 740) – Simplifying the Accounting for Income Taxes (“ASU 2019-12”). The amendments in ASU 2019-12 simplify the accounting for income taxes by removing certain exceptions regarding the incremental approach for intra-period tax allocations, deferred tax liabilities for equity method investments, and general methodology calculations when a year-to-date loss exceeds the anticipated loss. Additionally, ASU 2019-12 further simplifies accounting for income taxes by: (1) requiring certain franchise taxes to be accounted for as income-based tax or non-income-based tax; (2) requiring evaluation of the tax basis of goodwill in business combinations; (3) specifying the requirements and elections for allocating consolidated current and deferred tax expense to legal entities not subject to tax separately; and (4) requiring reflection of the effect of an enacted change in tax laws or rates in the annual effective tax rate computation in the interim period that includes the enactment date. ASU 2019-12 is effective for fiscal years beginning after December 15, 2020, with early adoption permitted. We elected to early adopt this standard effective April 1, 2020 on a prospective basis. The adoption did not have a material impact on our condensed consolidated financial statements and disclosures.
Recently Issued Accounting Pronouncements
In August 2018, the FASB issued ASU No. 2018-14 – Compensation – Retirement Benefits – Defined Benefit Plans – General (Subtopic 715-20): Disclosure Framework – Changes to the Disclosure Requirements for Defined Benefit Plans (“ASU 2018-14”). The amendments in ASU 2018-14 remove various disclosures that no longer are considered cost-beneficial, namely amounts in accumulated other comprehensive loss expected to be recognized as components of net periodic benefit cost over the next fiscal year. Further, ASU 2018-14 requires disclosure or clarification of the reasons for significant gains or losses related to changes in the benefit obligation for the period, as well as projected and accumulated benefit obligations in excess of plan assets. ASU 2018-14 is effective for fiscal years ending after December 15, 2020 and is required to be applied on a retrospective basis, with early adoption permitted. We are currently evaluating the impact of this new standard on our condensed consolidated financial statements and disclosures.
2.Inventories, net
At June 30, 2020 and December 31, 2019, inventories consisted of the following:
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June 30, 2020
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December 31, 2019
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(in thousands)
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Raw materials
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$
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44,689
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$
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44,218
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Work-in-process
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2,230
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2,809
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Finished goods
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33,736
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42,766
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Spare parts
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32,780
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31,997
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Inventories, net
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$
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113,435
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$
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121,790
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3.Asset Impairments
We are required to evaluate the recoverability of the carrying amount of our long-lived asset groups whenever events or changes in circumstances indicate that the carrying amount of the asset groups may not be recoverable. We performed an analysis of impairment indicators of the asset groups and the precipitous decline in oil and gas markets required a review of the assets of our Energy segment for recoverability.
Throughout 2020, our Energy segment was impacted by sequentially slower proppant demand, resulting in a surplus of proppant supply and significantly lower proppant pricing. In response to changing market demands, we idled operations at certain mines, terminals and resin-coating facilities, rationalized our railcar fleet and reduced production capacity at certain of our production facilities sand plants.
We reviewed the recoverability of our long-lived asset groups and, based upon our assessments, determined the carrying amount of certain long-lived asset groups within the Energy segment exceeded their respective fair values. In the second quarter of 2020, we recorded a total impairment charge of $288.2 million, which was allocated to the long-lived assets in the asset groups based on the relative carrying amounts of those assets. We determined the fair value of our long-lived asset groups based on the present value of the future cash flows that the underlying assets are expected to generate. Such estimates included unobservable inputs that required significant judgement utilizing a number of Level 3 inputs.
16
Covia Holdings Corporation and Subsidiaries
(Debtor-in-Possession)
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Certain mineral rights at the idled facilities were determined to no longer be recoverable. We recorded an impairment charge of $10.1 million to adjust these mineral rights to the estimated fair value.
We recorded a total of $298.3 million of asset impairments for the three and six months ended June 30, 2020, which were primarily related to our regional sand assets groups and all of which were within our Energy segment. We did not incur impairment charges during the three and six months ended June 30, 2019. These impairment charges are classified as Asset impairments in the Consolidated Statements of Loss.
4.Property, Plant, and Equipment, net
At June 30, 2020 and December 31, 2019, property, plant, and equipment consisted of the following:
|
|
|
June 30, 2020
|
|
|
December 31, 2019
|
|
|
|
|
(in thousands)
|
|
|
Land and improvements
|
|
$
|
225,354
|
|
|
$
|
230,300
|
|
|
Mineral rights properties
|
|
|
541,583
|
|
|
|
677,238
|
|
|
Machinery and equipment
|
|
|
1,176,514
|
|
|
|
1,338,411
|
|
|
Buildings and improvements
|
|
|
301,608
|
|
|
|
327,314
|
|
|
Railroad equipment
|
|
|
61,598
|
|
|
|
59,761
|
|
|
Furniture, fixtures, and other
|
|
|
5,178
|
|
|
|
5,382
|
|
|
Assets under construction
|
|
|
96,861
|
|
|
|
103,715
|
|
|
|
|
|
2,408,696
|
|
|
|
2,742,121
|
|
|
Accumulated depletion and depreciation
|
|
|
(1,340,225
|
)
|
|
|
(1,322,139
|
)
|
|
Property, plant, and equipment, net
|
|
$
|
1,068,471
|
|
|
$
|
1,419,982
|
|
Finance right-of-use assets are included within machinery and equipment.
5.Long-Term Debt
At June 30, 2020 and December 31, 2019, long-term debt consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
|
|
December 31, 2019
|
|
|
|
|
|
(in thousands)
|
|
|
Term Loan
|
|
$
|
|
-
|
|
|
$
|
|
1,566,440
|
|
|
Finance lease liabilities
|
|
|
|
1,503
|
|
|
|
|
6,875
|
|
|
Industrial Revenue Bond
|
|
|
|
-
|
|
|
|
|
10,000
|
|
|
Other borrowings
|
|
|
|
-
|
|
|
|
|
145
|
|
|
Term Loan deferred financing costs, net1
|
|
|
|
-
|
|
|
|
|
(25,754
|
)
|
|
Long-term debt, net subject to compromise2
|
|
|
|
1,572,073
|
|
|
|
|
-
|
|
|
Total debt, prior to reclassification to Liabilities subject to compromise
|
|
|
|
1,573,576
|
|
|
|
|
1,557,706
|
|
|
Less: current portion
|
|
|
|
(526
|
)
|
|
|
|
(18,633
|
)
|
|
Less: Amounts reclassified to Liabilities subject to compromise
|
|
|
|
(1,572,073
|
)
|
|
|
|
-
|
|
|
Total long-term debt including finance leases
|
|
$
|
|
977
|
|
|
$
|
|
1,539,073
|
|
|
|
(1)
|
As a result of the Company's Chapter 11 Cases, the Company expensed $24.3 million of Term Loan deferred financing costs, net, recorded in Reorganization items, net in the Condensed Consolidated Statements of Loss for both the three and six months ended June 30, 2020.
|
|
|
(2)
|
In connection with the Company’s Chapter 11 Cases, $1.6 billion outstanding under the Term Loan, $10.0 million outstanding under the Industrial Revenue Bond, $3.5 million outstanding on finance leases and $0.1 million outstanding on Other borrowings have been reclassified to Liabilities subject to compromise in our Condensed Consolidated Balance Sheets as of June 30, 2020. As of the Petition Date, we continued to accrue interest expense in relation to the Term Loan reclassified as Liabilities subject to compromise.
|
17
Covia Holdings Corporation and Subsidiaries
(Debtor-in-Possession)
Notes to Condensed Consolidated Financial Statements
(Unaudited)
As discussed in Note 1, the Company Parties filed voluntary petitions under Chapter 11 of the U.S. Bankruptcy code on June 29, 2020, which constitutes an Event of Default under the $1.65 billion senior secured term loan and the Industrial Revenue Bond. As such, at June 30, 2020, all outstanding debt has been classified as liabilities subject to compromise in the accompanying Condensed Consolidated Balance Sheets at June 30, 2020. See Note 1 for further detail on the Company Parties’ Voluntary Reorganization under Chapter 11.
Term Loan
On June 1, 2018, in connection with the Merger, we completed a debt refinancing transaction with Barclays Bank PLC as administrative agent by entering into a $1.65 billion senior secured term loan (the “Term Loan”) that was issued at par with a maturity date of June 1, 2025. The Term Loan requires quarterly principal payments of $4.1 million, reduced to $4.0 million after the December 2019 repurchases, and quarterly interest payments from September 30, 2018 through March 31, 2025 with the balance payable at the maturity date. Interest accrues at the rate of the three-month LIBOR plus 325 to 400 basis points depending on Total Net Leverage (as hereinafter defined) with a LIBOR floor of 1.0% or the Base Rate (as hereinafter defined). Total Net Leverage is defined as total debt net of up to $150.0 million of non-restricted cash, divided by EBITDA. The Term Loan is guaranteed by all of our wholly-owned, material, domestic, restricted subsidiaries (including Merger Sub as successor to Fairmount Santrol, and all of the wholly-owned material restricted subsidiaries of Fairmount Santrol), subject to certain exceptions. In addition, subject to various exceptions, the Term Loan is secured by substantially all of our assets and those of each guarantor, including, but not limited to (a) a perfected first-priority pledge of all of the capital stock held by us or any guarantor of each existing or subsequently acquired or organized wholly-owned restricted subsidiary (no more than 65% of the voting stock of any foreign subsidiary) and (b) perfected first priority security interests in substantially all of our tangible and intangible assets and those of each guarantor. The Term Loan is not guaranteed by certain foreign subsidiaries, including our Mexican and Canadian subsidiaries. We have the option to prepay the Term Loan without premium or penalty other than customary breakage costs with respect to LIBOR borrowings. There are no financial covenants governing the Term Loan. The Term Loan places certain restrictions on our ability to pay dividends on our common stock.
At June 30, 2020, the Term Loan had an interest rate of 5.4%. The filing of the Chapter 11 Cases constituted an event of default under the Term Loan. See Note 1 for further details.
Revolver
In addition to the Term Loan, on June 1, 2018, in connection with the Merger, we entered into a $200 million revolving credit facility (as amended, the “Revolver”) to replace a previous credit facility. There were no borrowings under the Revolver at December 31, 2019. We voluntarily cancelled the Revolver, effective December 31, 2019, in connection with receiving a commitment from PNC Bank, National Association, for a new, three-year credit facility for up to $75 million.
Receivables Facility
On March 31, 2020, we entered into a Receivables Financing Agreement (“RFA”) by and among (i) Covia, as initial servicer, (ii) Covia Financing LLC, a wholly-owned subsidiary of Covia, as borrower (“Covia Financing”), (iii) the persons from time to time party thereto, as lenders, (iv) PNC Bank, National Association, as LC bank and as administrative agent (“PNC”), and (v) PNC Capital Markets LLC, as structuring agent (“Structuring Agent”). In connection with the RFA, on March 31, 2020, Covia, as originator and servicer, and Covia Financing, as the buyer, entered into a Purchase and Sale Agreement (“PSA”), and various of Covia’s subsidiaries, as sub-originators (“Sub-Originators”), and Covia, as the buyer and servicer, entered into the Sub-Originator Purchase and Sale Agreement (“Sub-PSA”). Together, the RFA, the PSA, and the Sub-PSA (“Agreements”) established the primary terms and conditions of an accounts receivable securitization program (the “Receivables Facility”).
Pursuant to the terms of the Sub-PSA, the Sub-Originators would sell their receivables to Covia in a true sale conveyance. Pursuant to the PSA, Covia, in its capacity as originator, would sell in a true sale conveyance its receivables, including the receivables it purchased from the Sub-Originators, to Covia Financing. Under the Receivables Facility, Covia Financing could borrow or obtain letters of credit in an amount not to exceed $75 million in the aggregate and secure its obligations with a pledge of undivided interests in such receivables, together with related security and interests in the proceeds thereof, to PNC. The loans under the Receivables Facility were an obligation of Covia Financing and not the Sub-Originators or Covia. None of the Sub-Originators nor Covia guaranteed the collectability of the trade receivables or the creditworthiness of the obligors of the receivables.
18
Covia Holdings Corporation and Subsidiaries
(Debtor-in-Possession)
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Amounts outstanding under the Receivables Facility accrue interest based on LIBOR Market Index Rate, provided that Covia Financing may select adjusted LIBOR for a tranche period. The Receivables Facility was scheduled to terminate on March 31, 2023. There were no borrowings under the Receivables Facility at June 30, 2020.
The filing of the Chapter 11 Cases constituted an event of default under the Receivables Facility. On July 1, 2020, as part of the Plan and with the approval of the Bankruptcy Court, the Company terminated the Receivables Facility. See Note 1 and Note 25 for further detail on the Receivables Facility.
Industrial Revenue Bond
We hold a $10.0 million Industrial Revenue Bond related to the construction of a mining facility in Wisconsin. The bond bears interest, which is payable monthly at a variable rate. The rate was 0.14% at June 30, 2020. The bond matures on September 1, 2027 and is collateralized by a letter of credit of $10.0 million. The filing of the Chapter 11 Cases constituted an event of default under the Industrial Revenue Bond. See Note 1 for further details.
Other Borrowings
Other borrowings at June 30, 2020 and December 31, 2019 were comprised of a promissory note with three unrelated third parties. Two of these unrelated parties had interest rates of 1.0% and 4.11%, respectively, at both June 30, 2020 and December 31, 2019. The third unrelated party was repaid with proceeds from the sale of the Winchester & Western Railroad from September 10, 2019 and did not require any interest payments.
As of December 31, 2019, one of our subsidiaries had a C$2.0 million Canadian dollar overdraft facility with the Bank of Montreal. We had previously guaranteed the obligations of the subsidiary under the overdraft facility. On June 25, 2020, we amended the terms of the facility, reducing the amount to C$500,000 and removing the guarantee obligations. As of June 30, 2020 and December 31, 2019, there were no borrowings outstanding under the overdraft facility. The rates of the overdraft facility were 3.45% at June 30, 2020 and 4.95% at December 31, 2019.
At June 30, 2020 we had $37.0 million of outstanding standby letters of credit backed by the Receivables Facility. At December 31, 2019, we had $11.3 million of outstanding standby letters of credit held outside of a credit facility.
6.Accrued Expenses
At June 30, 2020 and December 31, 2019, accrued expenses consisted of the following:
|
|
|
June 30, 2020
|
|
|
December 31, 2019
|
|
|
|
|
(in thousands)
|
|
|
Accrued bonus & other benefits
|
|
$
|
5,926
|
|
|
$
|
9,220
|
|
|
Accrued restructuring and other charges
|
|
|
4,707
|
|
|
|
8,212
|
|
|
Accrued interest
|
|
|
-
|
|
|
|
24,480
|
|
|
Accrued insurance
|
|
|
6,653
|
|
|
|
8,770
|
|
|
Accrued property taxes
|
|
|
10,540
|
|
|
|
11,741
|
|
|
Other accrued expenses
|
|
|
5,523
|
|
|
|
64,472
|
|
|
Accrued expenses
|
|
$
|
33,349
|
|
|
$
|
126,895
|
|
19
Covia Holdings Corporation and Subsidiaries
(Debtor-in-Possession)
Notes to Condensed Consolidated Financial Statements
(Unaudited)
7.Earnings (Loss) per Share
The table below shows the computation of basic and diluted loss per share for the three and six months ended June 30, 2020 and 2019:
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
|
|
(in thousands, except per share data)
|
|
|
Numerators:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to Covia Holdings Corporation
|
|
$
|
(435,622
|
)
|
|
$
|
(34,394
|
)
|
|
$
|
(436,563
|
)
|
|
$
|
(86,639
|
)
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average shares outstanding
|
|
|
132,057
|
|
|
|
131,458
|
|
|
|
131,954
|
|
|
|
131,373
|
|
|
Dilutive effect of employee stock options and RSUs
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Diluted weighted average shares outstanding
|
|
|
132,057
|
|
|
|
131,458
|
|
|
|
131,954
|
|
|
|
131,373
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share – basic
|
|
|
(3.30
|
)
|
|
|
(0.26
|
)
|
|
|
(3.32
|
)
|
|
|
(0.66
|
)
|
|
Loss per share – diluted
|
|
$
|
(3.30
|
)
|
|
$
|
(0.26
|
)
|
|
$
|
(3.32
|
)
|
|
$
|
(0.66
|
)
|
The calculation of diluted weighted average shares outstanding for the three months ended June 30, 2020 and 2019 excludes 3.7 million and 5.2 million potential shares of common stock, respectively. The calculation of diluted weighted average shares outstanding for the six months ended June 30, 2020 and 2019 excludes 3.9 million and 2.9 million potential shares of common stock, respectively. These potential shares of common stock are excluded from the calculations of diluted weighted average shares outstanding because the effect of including these potential shares of common stock would be antidilutive.
The dilutive effect of 0.1 million and 0.2 million shares in the three and six months ended June 30, 2020, respectively, and 0.2 million and 0.3 million shares in the three and six months ended June 30, 2019, respectively, was omitted from the calculation of diluted weighted average shares outstanding and diluted loss per share because we were in a loss position in those periods.
8.Derivative Instruments
Due to our variable-rate indebtedness, we are exposed to fluctuations in interest rates. We have historically used fixed interest rate swaps to manage a portion of this exposure. No components of our cash flow hedging instruments were excluded from the assessment of hedge effectiveness. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for making fixed-rate payments over the life of the agreements without exchange of the underlying notional value. The gain or loss on the interest rate swap is recorded in accumulated other comprehensive loss and subsequently reclassified into interest expense in the same period during which the hedged transaction affects earnings.
The filing of the Chapter 11 Cases constituted an event of default under the agreements governing the interest rate swaps, resulting in the acceleration of our outstanding indebtedness thereunder and our derivative financial instruments to no longer be designated as cash flow hedging instruments. See Note 1 and Note 25 to our condensed consolidated financial statements for further discussion.
20
Covia Holdings Corporation and Subsidiaries
(Debtor-in-Possession)
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The following table summarizes our interest rate swap agreements at June 30, 2020 and December 31, 2019:
|
Interest Rate Swap Agreements
|
|
Maturity Date
|
|
Rate
|
|
|
Notional Value
(in thousands)
|
|
|
Debt Instrument Hedged
|
|
Percentage of Term
Loan Outstanding
|
|
|
June 30, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Not designated as cash flow hedge
|
|
June 1, 2025
|
|
2.87%
|
|
|
$
|
50,000
|
|
|
Term Loan
|
|
3%
|
|
|
Not designated as cash flow hedge
|
|
June 1, 2024
|
|
2.81%
|
|
|
|
50,000
|
|
|
Term Loan
|
|
3%
|
|
|
Not designated as cash flow hedge
|
|
June 1, 2025
|
|
2.85%
|
|
|
|
50,000
|
|
|
Term Loan
|
|
3%
|
|
|
Not designated as cash flow hedge
|
|
June 1, 2023
|
|
2.81%
|
|
|
|
100,000
|
|
|
Term Loan
|
|
6%
|
|
|
Not designated as cash flow hedge
|
|
June 1, 2025
|
|
2.87%
|
|
|
|
200,000
|
|
|
Term Loan
|
|
13%
|
|
|
|
|
|
|
|
|
|
|
$
|
450,000
|
|
|
|
|
28%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Swap Agreements
|
|
Maturity Date
|
|
Rate
|
|
|
Notional Value
(in thousands)
|
|
|
Debt Instrument Hedged
|
|
Percentage of Term
Loan Outstanding
|
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Designated as cash flow hedge
|
|
June 1, 2025
|
|
2.87%
|
|
|
$
|
50,000
|
|
|
Term Loan
|
|
3%
|
|
|
Designated as cash flow hedge
|
|
June 1, 2024
|
|
2.81%
|
|
|
|
50,000
|
|
|
Term Loan
|
|
3%
|
|
|
Designated as cash flow hedge
|
|
June 1, 2025
|
|
2.85%
|
|
|
|
50,000
|
|
|
Term Loan
|
|
3%
|
|
|
Designated as cash flow hedge
|
|
June 1, 2023
|
|
2.81%
|
|
|
|
100,000
|
|
|
Term Loan
|
|
6%
|
|
|
Designated as cash flow hedge
|
|
June 1, 2025
|
|
2.87%
|
|
|
|
200,000
|
|
|
Term Loan
|
|
13%
|
|
|
|
|
|
|
|
|
|
|
$
|
450,000
|
|
|
|
|
28%
|
|
The following table summarizes the fair values and the respective classification in the Condensed Consolidated Balance Sheets as of June 30, 2020 and December 31, 2019. The net amount of derivative liabilities can be reconciled to the tabular disclosure of fair value in Note 9:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
June 30, 2020
|
|
|
December 31, 2019
|
|
|
Interest Rate Swap Agreements
|
|
Balance Sheet Classification
|
|
(in thousands)
|
|
|
Designated as cash flow hedges
|
|
Other non-current liabilities
|
|
$
|
-
|
|
|
$
|
(13,420
|
)
|
|
Designated as cash flow hedges
|
|
Accrued expenses
|
|
|
-
|
|
|
|
(7,827
|
)
|
|
Not designated as cash flow hedges
|
|
Liabilities subject to compromise
|
|
|
(34,617
|
)
|
|
|
-
|
|
|
|
|
|
|
$
|
(34,617
|
)
|
|
$
|
(21,247
|
)
|
The table below presents the effect of cash flow hedge accounting on accumulated other comprehensive loss for the three and six months ended June 30, 2020 and 2019:
|
|
|
Amount of Loss Recognized in Other Comprehensive Loss
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
Derivatives in Hedging Relationships
|
|
(in thousands)
|
|
|
Designated as Cash Flow Hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap agreements
|
|
$
|
1,702
|
|
|
$
|
9,833
|
|
|
$
|
16,285
|
|
|
$
|
17,864
|
|
|
|
|
|
|
Amount of Loss Reclassified from Accumulated Other Comprehensive Loss
|
|
|
Derivatives in
|
|
Location of Loss
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
Hedging
|
|
Recognized on
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
Relationships
|
|
Derivative
|
|
(in thousands)
|
|
|
Designated as Cash Flow Hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap agreements
|
|
Interest expense, net
|
|
$
|
37,522
|
|
|
$
|
401
|
|
|
$
|
38,785
|
|
|
$
|
591
|
|
21
Covia Holdings Corporation and Subsidiaries
(Debtor-in-Possession)
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The table below presents the effect of our derivative financial instruments on the Condensed Consolidated Statements of Loss in the three and six months ended June 30, 2020 and 2019:
|
|
|
Location of Loss on Derivative
|
|
|
|
|
Interest expense, net
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
|
|
(in thousands)
|
|
|
Total Interest Expense presented in the Statements of Loss in which the effects of cash flow hedges are recorded
|
|
$
|
59,340
|
|
|
$
|
27,866
|
|
|
$
|
82,923
|
|
|
$
|
53,002
|
|
|
Effects of cash flow hedging:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on Hedging Relationships
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap agreements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of loss reclassified from accumulated other comprehensive loss to earnings
|
|
$
|
37,522
|
|
|
$
|
401
|
|
|
$
|
38,785
|
|
|
$
|
591
|
|
We reclassified $35.8 million of interest expense from accumulated other comprehensive loss for the three and six months ended June 30, 2020 due to the de-designation of our cash flow hedging instruments.
All of our derivative financial instruments are designated as cash flow hedging instruments through June 29th, 2020 for the three and six months ended June 30, 2020 and 2019. The table below presents the effect of our derivative financial instruments that were not designated as cash flow hedging instruments in the three and six months ended June 30, 2020.
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
Derivatives Not Designated as ASC 815-20 Cash Flow
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
Hedging Relationships
|
|
Location of (Gain) Loss Recognized
|
|
(in thousands)
|
|
|
Interest rate swap agreements
|
|
Interest expense, net
|
|
$
|
(60
|
)
|
|
$
|
-
|
|
|
$
|
(60
|
)
|
|
$
|
-
|
|
9.Fair Value Measurements
Financial instruments held by us include cash equivalents, accounts receivable, accounts payable, long-term debt (including the current portion thereof) and interest rate swaps.
Fair value is defined as the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date. In determining fair value, we utilize certain assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and/or the risks inherent in the inputs to the valuation technique.
Based on the examination of the inputs used in the valuation techniques, we are required to provide the following information according to the fair value hierarchy. The fair value hierarchy ranks the quality and reliability of the information used to determine fair values. Financial assets and liabilities at fair value will be classified and disclosed in one of the following three categories:
|
|
|
|
Level 1
|
Quoted market prices in active markets for identical assets or liabilities
|
|
Level 2
|
Observable market based inputs or unobservable inputs that are corroborated by market data
|
|
Level 3
|
Unobservable inputs that are not corroborated by market data
|
A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
22
Covia Holdings Corporation and Subsidiaries
(Debtor-in-Possession)
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The carrying value of cash equivalents, accounts receivable and accounts payable are considered to be representative of their fair values because of their short maturities. The carrying value of our long-term debt (including the current portion thereof) is recognized at amortized cost. The fair value of the Term Loan differs from amortized cost and is valued at prices obtained from a readily-available source for trading non-public debt, which represents quoted prices for identical or similar assets in markets that are not active, and therefore is considered Level 2. See Note 5 for further details on our long-term debt. The following table presents the fair value as of June 30, 2020 and December 31, 2019, respectively, for our long-term debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
in Active
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
|
|
|
|
Markets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
|
|
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Total
|
|
|
Long-Term Debt Fair Value Measurements
|
|
(in thousands)
|
|
|
June 30, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term Loan
|
|
$
|
-
|
|
|
$
|
872,765
|
|
|
$
|
-
|
|
|
$
|
872,765
|
|
|
Industrial Revenue Bond
|
|
|
-
|
|
|
|
10,000
|
|
|
|
-
|
|
|
|
10,000
|
|
|
|
|
$
|
-
|
|
|
$
|
882,765
|
|
|
$
|
-
|
|
|
$
|
882,765
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term Loan
|
|
$
|
-
|
|
|
$
|
1,210,075
|
|
|
$
|
-
|
|
|
$
|
1,210,075
|
|
|
Industrial Revenue Bond
|
|
|
-
|
|
|
|
10,000
|
|
|
|
-
|
|
|
|
10,000
|
|
|
|
|
$
|
-
|
|
|
$
|
1,220,075
|
|
|
$
|
-
|
|
|
$
|
1,220,075
|
|
The following table presents the amounts carried at fair value as of June 30, 2020 and December 31, 2019 for our other financial instruments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
in Active
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
|
|
|
|
Markets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
|
|
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Total
|
|
|
Recurring Fair Value Measurements
|
|
(in thousands)
|
|
|
June 30, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap agreements liability
|
|
$
|
-
|
|
|
$
|
34,617
|
|
|
$
|
-
|
|
|
$
|
34,617
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap agreements liability
|
|
$
|
-
|
|
|
$
|
21,247
|
|
|
$
|
-
|
|
|
$
|
21,247
|
|
Fair value of interest rate swap agreements is based on the present value of the expected future cash flows, considering the risks involved, and using discount rates appropriate for the maturity date. These are determined using Level 2 inputs.
10.Stock-Based Compensation
Stock-based compensation includes time-based restricted stock units (“RSUs”), performance-based restricted stock units (“PSUs”), and nonqualified stock options (“Options” and, together with the RSUs and PSUs, the “Awards”). These Awards are governed by various plans: the FMSA Holdings Inc. Long Term Incentive Compensation Plan (“2006 Plan”), the FMSA Holdings, Inc. Stock Option Plan (“2010 Plan”), the FMSA Holdings Inc. Amended and Restated 2014 Long Term Incentive Plan (“2014 Plan”), and the Covia Holdings Corporation 2018 Omnibus Incentive Plan (“2018 Plan”). Options may be exercised, in whole or in part, at any time after becoming exercisable, but not later than the date the Option expires, which is typically ten years from the original grant date. All Options granted under the 2006 Plan and 2010 Plan became fully vested as part of the Merger, and no Options have been granted since the Merger Date. PSUs granted under the 2014 Plan were converted to RSUs as part of the Merger. All Awards granted since the Merger Date have been made under the 2018 Plan and have been limited to RSUs and PSUs.
23
Covia Holdings Corporation and Subsidiaries
(Debtor-in-Possession)
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The fair values of the RSUs and Options were estimated at the Merger Date. The fair value of the RSUs was determined to be the opening share price of Covia’s common stock on the NYSE at the Merger Date. The fair value of Options was estimated at the Merger date using the Black Scholes-Merton option pricing model.
All Awards activity during the six months ended June 30, 2020 was as follows:
|
|
|
Options
|
|
|
Weighted
Average
Exercise
Price, Options
|
|
|
RSUs
|
|
|
Weighted
Average
Price at
RSU Issue Date
|
|
|
PSUs
|
|
|
Weighted
Average
Price at
PSU Issue Date
|
|
|
|
|
(in thousands, except per share data)
|
|
|
Outstanding at December 31, 2019
|
|
|
1,704
|
|
|
$
|
36.01
|
|
|
|
2,069
|
|
|
$
|
6.10
|
|
|
|
1,051
|
|
|
$
|
4.74
|
|
|
Exercised or distributed
|
|
|
-
|
|
|
|
-
|
|
|
|
(491
|
)
|
|
|
8.11
|
|
|
|
-
|
|
|
|
-
|
|
|
Forfeited
|
|
|
(3
|
)
|
|
|
44.28
|
|
|
|
(133
|
)
|
|
|
7.61
|
|
|
|
(131
|
)
|
|
|
4.74
|
|
|
Expired
|
|
|
(443
|
)
|
|
|
38.39
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Outstanding at June 30, 2020
|
|
|
1,258
|
|
|
$
|
35.15
|
|
|
|
1,445
|
|
|
$
|
5.28
|
|
|
|
920
|
|
|
$
|
4.74
|
|
We recorded stock compensation expense of $0.2 million and $3.3 million in the three months ended June 30, 2020 and 2019, respectively, and $1.8 million and $6.1 million in the six months ended June 30, 2020 and 2019, respectively. Stock compensation expense is included in selling, general, and administrative expenses on the Condensed Consolidated Statements of Loss and in additional paid-in capital on the Condensed Consolidated Balance Sheets.
11.Income Taxes
We compute and apply to ordinary income an estimated annual effective tax rate on a quarterly basis based on current and forecasted business levels and activities, including the mix of domestic and foreign results and enacted tax laws. The estimated annual effective tax rate is updated quarterly based on actual results and updated operating forecasts. Ordinary income refers to income from continuing operations before income tax expense excluding significant, unusual, or infrequently occurring items. The tax effect of an unusual or infrequently occurring item is recorded in the interim period in which it occurs as a discrete item of tax.
For the three months ended June 30, 2020, we recorded a tax benefit of $1.4 million on a loss before income taxes of $437.0 million resulting in an effective tax rate of 0.3%, compared to tax benefit of $5.1 million on a loss before income taxes of $39.5 million resulting in an effective tax rate of 13.0% for the same period of 2019. The decrease in the effective tax rate is primarily attributable to a valuation allowance set up on deferred taxes. The effective tax rate differs from the U.S. federal statutory rate primarily due to depletion, the impact of foreign taxes, tax provisions requiring U.S. income inclusion of foreign income, and changes to a valuation allowance set up on deferred taxes.
For the six months ended June 30, 2020, we recorded a tax benefit of $29.7 million on a loss before income taxes of $466.3 million resulting in an effective tax rate of 6.4%, compared to a tax benefit of $9.2 million on loss before income taxes of $95.8 million resulting in an effective tax rate of 9.6% for the same period of 2019. The increase in tax benefit is primarily attributable to a discrete benefit resulting from provisions of the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act allowing for increased carryback and utilization of net operating losses. The decrease in the effective tax rate is primarily attributable to a valuation allowance set up on deferred taxes offset by a discrete benefit resulting from provisions of the CARES Act allowing for increased carryback and utilization of net operating losses (see additional explanation below). The effective tax rate differs from the U.S. federal statutory rate primarily due to depletion, the impact of foreign taxes, tax provisions requiring U.S. income inclusion of foreign income, and changes to a valuation allowance set up on deferred taxes.
In response to the economic impact of the coronavirus (COVID-19) pandemic, on March 27, 2020, President Trump signed into law the CARES Act. The CARES Act enacts a number of economic relief measures, including the infusion of various tax cash benefits into negatively affected companies to ease the impact of the pandemic. The CARES Act specifically includes provisions allowing net operating losses arising in tax years beginning after December 31, 2017, and before January 1, 2021 to be carried back to each of the five tax years preceding the tax year of such loss. In addition, the CARES Act removed the limitation that net operating losses generated after 2017 could only offset 80% of taxable income. For the six months ended June 30, 2020, we recorded discrete benefits of $29.7 million resulting from this change as losses now eligible for utilization were estimated as not realizable prior to the CARES Act.
24
Covia Holdings Corporation and Subsidiaries
(Debtor-in-Possession)
Notes to Condensed Consolidated Financial Statements
(Unaudited)
12.Pension and Other Post-Employment Benefits
We maintain retirement, post-retirement medical and long-term benefit plans in several countries.
In the U.S., we sponsor the Covia Holdings Corporation Pension Plan, formerly known as the Unimin Corporation Pension Plan (the “Pension Plan”), a defined benefit plan for hourly and salaried employees, and the Covia Holdings Corporation Restoration Plan, formerly known as the Unimin Corporation Pension Restoration Plan (the “Restoration Plan”), a non-qualified supplemental benefit plan. The Pension Plan is a funded plan. Minimum funding and maximum tax-deductible contribution limits for the Pension Plan are defined by the Internal Revenue Service. The Restoration Plan is unfunded. Under the Restoration Plan, salaried participants accrue benefits based on service and final average pay. The benefits of hourly participants' are based on service and a benefit formula. The Pension Plan was closed to new entrants effective January 1, 2008, and union employee participation in the Pension Plan at the last three unionized locations participating in the Pension Plan was closed to new entrants effective November 1, 2017. Until the Restoration Plan was amended to exclude new entrants on August 15, 2017, all salaried participants eligible for the Pension Plan were also eligible for the Restoration Plan. The Pension Plan was frozen as of December 31, 2018 for all non-union employees, and the Restoration Plan was frozen for all participants as of December 31, 2018.
An independent trustee has been appointed for the Pension Plan whose responsibilities include custody of plan assets as well as recordkeeping. A pension committee consisting of members of senior management provides oversight of the Pension Plan. In addition, an independent advisor has been engaged for the Pension Plan to provide advice on the management of the plan assets. The primary risk of the Pension Plan is the volatility of the funded status. Liabilities are exposed to interest rate risk and demographic risk (e.g., mortality, turnover, etc.). Assets are exposed to interest rate risk, market risk, and credit risk.
In addition to the Restoration Plan and the Pension Plan in the U.S., we offer a retiree medical plan in the U.S. to certain union employees that is exposed to risk of increases in health care costs. The retiree medical plan previously covered certain salaried employees and certain groups of hourly employees, but effective December 31, 2018, the retiree medical plan was terminated for salaried employees. The retiree medical plan remains open to certain groups of union employees.
In Canada, we sponsor three defined benefit retirement plans. Two of the plans are for hourly employees and one is for salaried employees. Salaried employees were eligible to participate in a plan consisting of a defined benefit portion that has been closed to new entrants since January 1, 2008 and a defined contribution portion for employees hired after January 1, 2018. Minimum funding is required under the provincial Pension Benefits Act (Ontario) and related regulations and maximum funding is set in the Federal Income Tax Act of Canada and regulations. The defined benefit retirement plans are administered by Covia Canada Ltd., a wholly-owned subsidiary of Covia Holdings Corporation (“Covia Canada”). A pension committee exists to ensure proper administration, management and investment review with respect to the benefits of the defined benefit retirement plans through implementation of governance procedures. In addition, there are two post-retirement medical plans in Canada. The medical plans are administered by an insurance company with Covia Canada having the ultimate responsibility for all decisions.
In Mexico, we sponsor four retirement plans, two of which are seniority premium plans as defined by Mexican labor law. The remaining plans are defined benefit plans with a minimum benefit equal to the severance payment that would have been paid in the event of termination for other than just cause, required by Mexican labor law. Minimum funding is not required, and maximum funding is defined according to the actuarial cost method registered with the Mexican Tax Authority. Investment decisions are made by an administrative committee of Grupo Materias Primas de Mexico S. de R. L. de C.V., a wholly-owned indirect subsidiary of Covia Holdings Corporation. All plans in Mexico pay lump sums on retirement and pension plans pay benefits through five annual payments conditioned on compliance with non-compete covenants.
As part of the Merger, we assumed the two defined benefit pension plans of Fairmount Santrol, the Wedron Silica Company Hourly Employees’ Pension Plan (the “Wedron Pension Plan”) and the Pension Plan for Hourly Bargaining Unit of Technisand – Troy Grove (the “Troy Grove Pension Plan”). These plans cover union employees at certain facilities and provide benefit units based upon years of service. Benefits under the Wedron Pension Plan were frozen effective December 31, 2012. Benefits under the Troy Grove Pension Plan were frozen effective December 31, 2016.
25
Covia Holdings Corporation and Subsidiaries
(Debtor-in-Possession)
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The Pension Plan, Restoration Plan, Wedron Pension Plan and Troy Grove Pension Plan were merged into one plan, effective December 31, 2019 (the “Covia Pension Plan”). The post-retirement medical plans in the United States and Canada are collectively referred to as the “Postretirement Medical Plans.”
We have applied settlement accounting in the six months ended June 30, 2020 and 2019 due to distributions exceeding the current period service and interest costs. These amounts are included in other non-operating expense, net on the Condensed Consolidated Statements of Loss. As a result of the distributions, we re-measured our obligations under the Covia Pension Plan and the discount rate was increased from 3.15% at January 1, 2020 to 3.35% at March 31, 2020 and decreased to 2.55% at June 30, 2020. There were no other changes to the assumptions used to calculate the obligation at June 30, 2020.
The following tables summarize the components of net periodic benefit costs. Service costs incurred for plant personnel are included in cost of goods sold. Service costs incurred for corporate personnel and retirees are included in selling, general, and administrative expenses. All other components of net period benefit cost are included in other non-operating expense, net on the Condensed Consolidated Statements of Loss, for the three and six months ended June 30, 2020 and 2019 as follows:
|
|
|
Covia Pension Plan
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
|
|
(in thousands)
|
|
|
Components of net periodic benefit cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
126
|
|
|
$
|
551
|
|
|
$
|
252
|
|
|
$
|
1,102
|
|
|
Interest cost
|
|
|
978
|
|
|
|
2,084
|
|
|
$
|
1,949
|
|
|
|
4,168
|
|
|
Expected return on plan assets
|
|
|
(1,133
|
)
|
|
|
(2,308
|
)
|
|
$
|
(2,396
|
)
|
|
|
(4,616
|
)
|
|
Amortization of prior service cost
|
|
|
27
|
|
|
|
82
|
|
|
$
|
54
|
|
|
|
164
|
|
|
Amortization of net actuarial loss
|
|
|
536
|
|
|
|
522
|
|
|
$
|
1,012
|
|
|
|
1,044
|
|
|
Settlement loss
|
|
|
1,449
|
|
|
|
1,065
|
|
|
$
|
3,460
|
|
|
|
2,744
|
|
|
Net periodic benefit cost
|
|
$
|
1,983
|
|
|
$
|
1,996
|
|
|
$
|
4,331
|
|
|
$
|
4,606
|
|
|
|
|
Postretirement Medical Plans
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
|
|
(in thousands)
|
|
|
Components of net periodic benefit cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
78
|
|
|
$
|
73
|
|
|
$
|
157
|
|
|
$
|
146
|
|
|
Interest cost
|
|
|
36
|
|
|
|
120
|
|
|
|
71
|
|
|
|
240
|
|
|
Amortization of net actuarial loss
|
|
|
14
|
|
|
|
40
|
|
|
|
29
|
|
|
|
80
|
|
|
Net periodic benefit cost
|
|
$
|
128
|
|
|
$
|
233
|
|
|
$
|
257
|
|
|
$
|
466
|
|
We contributed $1.8 million and $0.7 million to the Covia Pension Plan for the six months ended June 30, 2020 and 2019, respectively. Contributions into the Covia Pension Plans for the year ended December 31, 2020 are expected to be $2.0 million.
We have received authorization from the Bankruptcy Court to continue making our contributions to plans for employees located in the United States in the ordinary course during our Chapter 11 Cases. The Company will continue making contributions to plans for employees located outside of the United States in the ordinary course of business.
26
Covia Holdings Corporation and Subsidiaries
(Debtor-in-Possession)
Notes to Condensed Consolidated Financial Statements
(Unaudited)
13.Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss is a separate line within the Condensed Consolidated Statements of Equity that reports our cumulative loss that has not been reported as part of net loss. The components of accumulated other comprehensive loss attributable to Covia at June 30, 2020 and December 31, 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
|
|
|
|
Gross
|
|
|
Tax Effect
|
|
|
Net Amount
|
|
|
|
|
(in thousands)
|
|
|
Foreign currency translation adjustments
|
|
$
|
(71,124
|
)
|
|
$
|
-
|
|
|
$
|
(71,124
|
)
|
|
Amounts related to employee benefit obligations
|
|
|
(50,778
|
)
|
|
|
14,726
|
|
|
|
(36,052
|
)
|
|
|
|
$
|
(121,902
|
)
|
|
$
|
14,726
|
|
|
$
|
(107,176
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
|
|
Gross
|
|
|
Tax Effect
|
|
|
Net Amount
|
|
|
|
|
(in thousands)
|
|
|
Foreign currency translation adjustments
|
|
$
|
(47,584
|
)
|
|
$
|
-
|
|
|
$
|
(47,584
|
)
|
|
Amounts related to employee benefit obligations
|
|
|
(54,650
|
)
|
|
|
14,882
|
|
|
|
(39,768
|
)
|
|
Unrealized gain (loss) on interest rate hedges
|
|
|
(22,500
|
)
|
|
|
4,766
|
|
|
|
(17,734
|
)
|
|
|
|
$
|
(124,734
|
)
|
|
$
|
19,648
|
|
|
$
|
(105,086
|
)
|
The following table presents the changes in accumulated other comprehensive loss, net of taxes, by component for the six months ended June 30, 2020:
|
|
|
Six Months Ended June 30, 2020
|
|
|
|
|
Foreign currency
translation
adjustments
|
|
|
Amounts related to
employee benefit
obligations
|
|
|
Unrealized gain (loss)
on interest
rate hedges
|
|
|
Total
|
|
|
|
|
(in thousands)
|
|
|
Beginning balance
|
|
$
|
(47,584
|
)
|
|
$
|
(39,768
|
)
|
|
$
|
(17,734
|
)
|
|
$
|
(105,086
|
)
|
|
Other comprehensive loss before reclassifications
|
|
|
(23,540
|
)
|
|
|
(839
|
)
|
|
|
(16,285
|
)
|
|
|
(40,664
|
)
|
|
Amounts reclassified from accumulated other comprehensive loss
|
|
|
-
|
|
|
|
4,555
|
|
|
|
34,019
|
|
|
|
38,574
|
|
|
Ending balance
|
|
$
|
(71,124
|
)
|
|
$
|
(36,052
|
)
|
|
$
|
-
|
|
|
$
|
(107,176
|
)
|
27
Covia Holdings Corporation and Subsidiaries
(Debtor-in-Possession)
Notes to Condensed Consolidated Financial Statements
(Unaudited)
14.Leases
Operating leases and finance leases are included in the Condensed Consolidated Balance Sheets as follows:
|
|
|
Classification
|
|
June 30, 2020
|
|
|
December 31, 2019
|
|
|
|
|
|
|
(in thousands)
|
|
|
Lease assets
|
|
|
|
|
|
|
|
|
|
|
|
Operating right-of-use assets, net
|
|
Assets
|
|
$
|
145,753
|
|
|
$
|
158,489
|
|
|
Finance right-of-use assets, net
|
|
Property, plant, and equipment, net
|
|
|
4,478
|
|
|
|
11,083
|
|
|
Total lease assets
|
|
|
|
$
|
150,231
|
|
|
$
|
169,572
|
|
|
Lease liabilities
|
|
|
|
|
|
|
|
|
|
|
|
Operating lease liabilities, current
|
|
Current liabilities
|
|
$
|
1,375
|
|
|
$
|
63,773
|
|
|
Operating lease liabilities, non-current
|
|
Liabilities
|
|
|
3,754
|
|
|
|
272,378
|
|
|
Finance lease liabilities, current
|
|
Current portion of long-term debt
|
|
|
526
|
|
|
|
3,496
|
|
|
Finance lease liabilities, non-current
|
|
Long-term debt
|
|
|
977
|
|
|
|
3,379
|
|
|
Total lease liabilities
|
|
|
|
$
|
6,632
|
|
|
$
|
343,026
|
|
See Note 22 for operating lease liabilities and finance lease liabilities that were reclassified to Liabilities subject to compromise in the Consolidated Balance Sheets at June 30, 2020.
Operating lease costs are recorded on a straight-line basis over the lease term. The change in operating lease costs for the six months ended June 30, 2020 when compared to the six months ended June 30, 2019 is due to the impairment on operating right-of-use assets recognized during the three months ended December 31, 2019. For operating leases that have been impaired, the lease liability continues to amortize using the same effective interest method as before the impairment charge and the operating right-of-use asset is amortized on a straight-line basis. Finance lease costs include amortization of the right-of-use assets and interest on lease liabilities. The components of lease costs, which were included in loss from operations in our Condensed Consolidated Statements of Loss, were as follows:
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
|
|
(in thousands)
|
|
|
Operating leases
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating lease costs
|
|
$
|
10,500
|
|
|
$
|
25,767
|
|
|
$
|
21,353
|
|
|
$
|
52,959
|
|
|
Variable lease costs
|
|
|
67
|
|
|
|
655
|
|
|
|
295
|
|
|
|
806
|
|
|
Short-term lease costs
|
|
|
2,878
|
|
|
|
4,347
|
|
|
|
6,800
|
|
|
|
9,205
|
|
|
Total operating lease costs
|
|
$
|
13,445
|
|
|
$
|
30,769
|
|
|
$
|
28,448
|
|
|
$
|
62,970
|
|
|
Financing leases
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of right-of-use asset
|
|
$
|
130
|
|
|
$
|
644
|
|
|
$
|
1,003
|
|
|
$
|
1,263
|
|
|
Interest on finance lease liabilities
|
|
|
61
|
|
|
|
73
|
|
|
|
130
|
|
|
|
110
|
|
|
Total finance lease costs
|
|
$
|
191
|
|
|
$
|
717
|
|
|
$
|
1,133
|
|
|
$
|
1,373
|
|
Additional information related to leases is presented as follows:
|
|
|
Six Months Ended June 30,
|
|
|
|
|
2020
|
|
|
|
|
2019
|
|
|
|
|
(in thousands)
|
|
|
Cash paid for amounts included in the measurement of lease liabilities
|
|
|
|
|
|
|
|
|
|
|
|
Operating cash flows from operating leases
|
|
$
|
24,630
|
|
|
|
|
$
|
50,351
|
|
|
Financing cash flows from finance leases
|
|
|
2,293
|
|
|
|
|
|
2,452
|
|
|
Total cash paid
|
|
$
|
26,923
|
|
|
|
|
$
|
52,803
|
|
28
Covia Holdings Corporation and Subsidiaries
(Debtor-in-Possession)
Notes to Condensed Consolidated Financial Statements
(Unaudited)
15.Asset Retirement Obligations
Asset retirement obligations are recorded in Other non-current liabilities in the Consolidated Balance Sheets. Changes in the asset retirement obligations during the six months ended June 30, 2020 and 2019 were as follows:
|
|
|
June 30, 2020
|
|
|
June 30, 2019
|
|
|
|
|
(in thousands)
|
|
|
Beginning balance
|
|
$
|
46,510
|
|
|
$
|
31,199
|
|
|
Accretion
|
|
|
944
|
|
|
|
903
|
|
|
Additions and revisions of prior estimates
|
|
|
6,514
|
|
|
|
-
|
|
|
Ending balance
|
|
$
|
53,968
|
|
|
$
|
32,102
|
|
Asset retirement obligations increased from June 30, 2019 to June 30, 2020 primarily due to shortened mines lives and renewed estimates recorded in the fourth quarter of 2019 and through the six months ended June 30, 2020.
16.Commitments and Contingent Liabilities
Contingencies
We are involved in various legal proceedings, including as a defendant in a number of lawsuits. Although the outcomes of these proceedings and lawsuits cannot be predicted with certainty, we do not believe that any of the pending legal proceedings and lawsuits are reasonably likely to have a material adverse effect on our financial position, results of operations or cash flows. In addition, we believe that our insurance coverage will mitigate many of these claims.
We and/or our predecessors have been named as a defendant, usually among many defendants, in numerous product liability lawsuits brought by or on behalf of current or former employees of our customers alleging damages caused by silica exposure. As of June 30, 2020, there were 40 active silica-related products liability lawsuits pending in which we are a defendant. Although the outcomes of these lawsuits cannot be predicted with certainty, we do not believe that these matters are reasonably likely to have a material adverse effect on our financial position, results of operations or cash flows.
On March 18, 2019, in connection with a non-public SEC investigation, we received a subpoena seeking information relating to certain value-added proppants used in the Energy segment. Since the issuance of that subpoena, the SEC has requested additional information and subpoenaed certain former employees to testify regarding certain value-added proppants marketed and sold by Fairmount Santrol prior to the Merger. On July 7, 2020, we received a written Wells Notice from the SEC staff indicating the staff’s preliminary determination to recommend to the Commission that the SEC file an action against the Company relating to the subject of this investigation. A Wells Notice is neither a formal charge of wrongdoing nor a finding that the Company violated any law. Rather, the Wells Notice provides the Company an opportunity to respond to issues raised by the SEC staff and offer its perspective prior to any SEC decision. The Company will continue to cooperate with the SEC’s investigation and will make a submission to the SEC staff setting forth why no action should be commenced against it. The investigation is ongoing, and we cannot provide an estimate of the potential range of loss, if any, that may result. Accordingly, no accrual has been made with respect to this matter.
On June 29, 2020, the Company Parties filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code in Bankruptcy Court. As a result of such bankruptcy filings, substantially all legal proceedings pending against the Company Parties have been stayed.
Royalties
We have entered into numerous mineral rights agreements, in which payments under the agreements are expensed as incurred. Certain agreements require annual or quarterly payments based upon annual tons mined or the average selling price of tons sold. Total royalty expense associated with these agreements was $0.9 million and $3.1 million for the three months ended June 30, 2020 and 2019, respectively, and $3.5 million and $5.6 million for the six months ended June 30, 2020 and 2019, respectively.
29
Covia Holdings Corporation and Subsidiaries
(Debtor-in-Possession)
Notes to Condensed Consolidated Financial Statements
(Unaudited)
17.Transactions with Related Parties
We sell minerals to SCR-Sibelco NV, the owner of approximately 65% of the outstanding shares of Covia’s common stock (“Sibelco”), and certain of its subsidiaries (together with Sibelco, collectively, “related parties”). Sales to related parties amounted to $2.3 million in both the three months ended June 30, 2020 and 2019 and $4.6 million and $4.5 million in the six months ended June 30, 2020 and 2019, respectively. At June 30, 2020 and December 31, 2019, we had accounts receivable from related parties of $2.0 and $1.8 million, respectively. These amounts are included in Accounts receivable, net in the accompanying Condensed Consolidated Balance Sheets.
We purchase minerals from certain related parties. Purchases from related parties amounted to $5.9 million and $2.0 million in the three months ended June 30, 2020 and 2019, respectively, and $6.9 million and $2.0 million in the six months ended June 30, 2020 and 2019, respectively. At June 30, 2020 and December 31, 2019, we had accounts payable to related parties of $0.1 million and $0.9 million, respectively. These amounts are included in Liabilities subject to compromise in the accompanying Condensed Consolidated Balance Sheets.
On June 1, 2018, we entered into an agreement with Sibelco whereby Sibelco provides sales and marketing support for certain products supporting the performance coatings and polymer solutions markets in North America and Mexico, for which we pay a 5% commission of revenue, and in the rest of the world, for which we pay a 10% commission of revenue. Sibelco also assists with sales and marketing efforts for certain products in the ceramics and sanitary ware industries outside of North America and Mexico for which we pay a 5% commission of revenue. In addition, we provide sales and marketing support to Sibelco for certain products used in ceramics in North America and Mexico for which we earn a 10% commission of revenue. We recorded net commission expense of $0.7 million and $1.1 million in the three months ended June 30, 2020 and 2019, respectively, and $1.4 million and $2.1 million in the six months ended June 30, 2020 and 2019, respectively. These amounts are recorded in Selling, general and administrative expenses on the Condensed Consolidated Statements of Loss.
18.Revenues
Revenues are primarily derived from contracts with customers with terms typically ranging from one to eight years in length and are measured by the amount of consideration we expect to receive in exchange for transferring our products. Revenues are recognized as each performance obligation within the contract is satisfied; this occurs with the transfer of control of our product in accordance with delivery methods as defined in the underlying contract. Performance obligations do not extend beyond one year. Transfer of control to customers generally occurs when products leave our facilities or at other predetermined control transfer point. We account for shipping and handling activities that occur after control of the related good transfers as a cost of fulfillment instead of a separate performance obligation.
We disaggregate revenues by major source consistent with our segment reporting. See Note 9 for further disaggregation of revenue.
Accounts receivable as presented in the Condensed Consolidated Balance Sheets are related to our contracts and are recorded when the right to consideration becomes likely at the amount management expects to collect. Accounts receivable do not bear interest if paid when contractually due, and payments are generally due within thirty to forty-five days of invoicing. We typically do not record contract assets, as the transfer of control of our products results in an unconditional right to receive consideration.
30
Covia Holdings Corporation and Subsidiaries
(Debtor-in-Possession)
Notes to Condensed Consolidated Financial Statements
(Unaudited)
We enter into certain supply agreements with customers that include provisions requiring payment at the inception of the supply agreement. Deferred revenue is recorded when payment is received in advance of the performance obligation. Changes in deferred revenue were as follows:
|
|
|
Six Months Ended June 30,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
(in thousands)
|
|
|
Beginning balance
|
|
$
|
13,194
|
|
|
$
|
10,826
|
|
|
Deferral of revenue
|
|
|
21,000
|
|
|
|
23,370
|
|
|
Recognition of unearned revenue
|
|
|
(15,082
|
)
|
|
|
(9,784
|
)
|
|
Ending balance
|
|
$
|
19,112
|
|
|
$
|
24,412
|
|
At June 30, 2020 and December 31, 2019, respectively, deferred revenue balances of $14.4 million and $7.8 million were recorded as current liabilities. At June 30, 2020 and December 31, 2019, respectively, deferred revenue balances of $4.7 million and $5.4 million were recorded in other non-current liabilities.
At June 30, 2020 and December 31, 2019, respectively, we did not have any customers whose accounts receivable balance exceeded 10% of total accounts receivable.
In the six months ended June 30, 2020, we did not have any customers that exceeded 10% of revenues. In the six months ended June 30, 2019, one customer in our Energy segment exceeded 10% of revenues and accounted for 11% of revenues in such period.
19.Segment Reporting
We organize our business into two reportable segments, Energy and Industrial. Our Energy segment offers the oil and gas industry a comprehensive portfolio of raw frac sand, value-added-proppants, well-cementing additives, gravel-packing media and drilling mud additives. Our products serve hydraulic fracturing operations in the U.S., Canada, Argentina, Mexico, China, and northern Europe. The Industrial segment provides raw, value-added and custom-blended products to the glass, ceramics, metals, coatings, polymers, construction, foundry, filtration, sports and recreation and various other industries.
Prior to the second quarter of 2019, the Company’s chief operating decision maker (“CODM”) primarily evaluated an operating segment’s performance based on segment gross profit, which does not include any selling, general, and administrative costs or corporate costs. Beginning with the second quarter of 2019, the CODM changed the method to evaluate the Company’s operating segments’ performance based on segment contribution margin. Segment contribution margin excludes selling, general, and administrative costs, corporate costs, operating costs of idled facilities, and operating costs of excess railcar capacity. This change was made to better measure the operating performance of the reportable segments and to monitor performance without these non-operational costs.
The reportable segments are consistent with how management views the markets served by us and the financial information reviewed by the CODM in deciding how to allocate resources and assess performance.
31
Covia Holdings Corporation and Subsidiaries
(Debtor-in-Possession)
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Segment information for all periods presented in the table below has been revised accordingly to reflect the new measure of profit and loss.
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
|
|
(in thousands)
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Energy
|
|
$
|
68,612
|
|
|
$
|
251,547
|
|
|
$
|
220,985
|
|
|
$
|
487,622
|
|
|
Industrial
|
|
|
150,921
|
|
|
|
193,389
|
|
|
|
321,208
|
|
|
|
385,560
|
|
|
Total revenues
|
|
|
219,533
|
|
|
|
444,936
|
|
|
|
542,193
|
|
|
|
873,182
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment contribution margin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Energy
|
|
|
3,380
|
|
|
|
40,912
|
|
|
|
24,894
|
|
|
|
62,931
|
|
|
Industrial
|
|
|
48,578
|
|
|
|
65,109
|
|
|
|
102,778
|
|
|
|
116,731
|
|
|
Total segment contribution margin
|
|
|
51,958
|
|
|
|
106,021
|
|
|
|
127,672
|
|
|
|
179,662
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs of idled facilities and excess railcar capacity
|
|
|
13,659
|
|
|
|
7,054
|
|
|
|
20,587
|
|
|
|
14,009
|
|
|
Selling, general, and administrative
|
|
|
29,744
|
|
|
|
38,644
|
|
|
|
63,191
|
|
|
|
80,604
|
|
|
Depreciation, depletion, and amortization
|
|
|
31,209
|
|
|
|
59,204
|
|
|
|
66,039
|
|
|
|
117,299
|
|
|
Asset impairments
|
|
|
298,299
|
|
|
|
-
|
|
|
|
298,299
|
|
|
|
-
|
|
|
Restructuring and other charges
|
|
|
29,414
|
|
|
|
9,535
|
|
|
|
34,913
|
|
|
|
11,537
|
|
|
Other operating income, net
|
|
|
329
|
|
|
|
1,670
|
|
|
|
(1,939
|
)
|
|
|
(4,722
|
)
|
|
Loss from operations
|
|
|
(350,696
|
)
|
|
|
(10,086
|
)
|
|
|
(353,418
|
)
|
|
|
(39,065
|
)
|
|
Interest expense, net
|
|
|
59,340
|
|
|
|
27,866
|
|
|
|
82,923
|
|
|
|
53,002
|
|
|
Reorganization items, net
|
|
|
24,316
|
|
|
|
-
|
|
|
|
24,316
|
|
|
|
-
|
|
|
Other non-operating expense, net
|
|
|
2,683
|
|
|
|
1,571
|
|
|
|
5,595
|
|
|
|
3,758
|
|
|
Loss before provision (benefit) from income taxes
|
|
$
|
(437,035
|
)
|
|
$
|
(39,523
|
)
|
|
$
|
(466,252
|
)
|
|
$
|
(95,825
|
)
|
Asset information, including capital expenditures and depreciation, depletion, and amortization, by segment is not included in reports used by management in its monitoring of performance and, therefore, is not reported by segment.
32
Covia Holdings Corporation and Subsidiaries
(Debtor-in-Possession)
Notes to Condensed Consolidated Financial Statements
(Unaudited)
20.Goodwill and Intangible Assets
Goodwill represents the excess of purchase price over the fair value of net assets acquired in business combinations. Goodwill was $119.8 million at both June 30, 2020 and December 31, 2019, and is entirely attributable to the Industrial segment. We evaluate goodwill at the reporting unit level on an annual basis on October 31 and also on an interim basis when indicators of impairment exist. There were no events or changes in circumstances that would more likely than not result in an impairment in the carrying value of goodwill at June 30, 2020.
Changes in the carrying amount of intangible assets are as follows:
|
|
|
June 30, 2020
|
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Amortization
|
|
|
Intangible
Assets,
net
|
|
|
Weighted
Average
Amortization
Period
|
|
|
|
(in thousands)
|
|
|
|
|
Stream mitigation rights
|
|
$
|
2,328
|
|
|
$
|
(971
|
)
|
|
$
|
(40
|
)
|
|
$
|
1,317
|
|
|
16 years
|
|
Customer relationships
|
|
|
51,537
|
|
|
|
(19,264
|
)
|
|
|
(3,309
|
)
|
|
|
28,964
|
|
|
4 years
|
|
Intangible assets, net
|
|
$
|
53,865
|
|
|
$
|
(20,235
|
)
|
|
$
|
(3,349
|
)
|
|
$
|
30,281
|
|
|
4 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Impairment
|
|
|
Intangible
Assets,
net
|
|
|
Weighted
Average
Amortization
Period
|
|
|
|
(in thousands)
|
|
|
|
|
Stream mitigation rights
|
|
$
|
4,170
|
|
|
$
|
(971
|
)
|
|
$
|
(1,842
|
)
|
|
$
|
1,357
|
|
|
17 years
|
|
Customer relationships
|
|
|
73,000
|
|
|
|
(19,264
|
)
|
|
|
(21,463
|
)
|
|
|
32,273
|
|
|
4 years
|
|
Intangible assets, net
|
|
$
|
77,170
|
|
|
$
|
(20,235
|
)
|
|
$
|
(23,305
|
)
|
|
$
|
33,630
|
|
|
5 years
|
Amortization expense is recognized in depreciation, depletion and amortization expense in the Condensed Consolidated Statements of Loss. Amortization expense was $1.4 million and $6.6 million for the three months ended June 30, 2020 and 2019, respectively, and $3.3 million and $15.0 million for the six months ended June 30, 2020 and 2019, respectively.
The estimated amortization expense related to intangible assets for the five succeeding years is as follows:
|
|
|
Amortization
|
|
|
|
|
(in thousands)
|
|
|
2020
|
|
$
|
3,797
|
|
|
2021
|
|
|
7,594
|
|
|
2022
|
|
|
7,594
|
|
|
2023
|
|
|
7,594
|
|
|
2024
|
|
|
3,189
|
|
|
Thereafter
|
|
|
513
|
|
|
Total
|
|
$
|
30,281
|
|
21.Merger-Related Restructuring and Other Charges
In response to changing market demands, we idled operations and reduced capacities at facilities serving the Energy segment. We did not allocate Merger-related restructuring charges to our Energy segment.
Additionally, in connection with the Merger, we initiated restructuring activities to achieve cost synergies from our combined operations. We did not allocate these Merger-related restructuring charges to either of our business segments.
33
Covia Holdings Corporation and Subsidiaries
(Debtor-in-Possession)
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The following table presents a summary of our Merger-related restructuring charges for the six months ended June 30, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Merger-related
|
|
|
Idled facilities
|
|
|
Total
|
|
|
|
|
(in thousands)
|
|
|
Six Months Ended June 30, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance and relocation costs
|
|
$
|
-
|
|
|
$
|
11,184
|
|
|
$
|
11,184
|
|
|
Total restructuring charges
|
|
$
|
-
|
|
|
$
|
11,184
|
|
|
$
|
11,184
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance and relocation costs
|
|
$
|
1,921
|
|
|
$
|
2,868
|
|
|
$
|
4,789
|
|
|
Contract termination costs
|
|
|
-
|
|
|
|
1,293
|
|
|
|
1,293
|
|
|
Total restructuring charges
|
|
$
|
1,921
|
|
|
$
|
4,161
|
|
|
$
|
6,082
|
|
The following table presents our Merger-related restructuring reserve activity during the six months ended June 30, 2020 and 2019:
|
|
|
Merger-related
|
|
|
Idled facilities
|
|
|
Total
|
|
|
|
|
(in thousands)
|
|
|
Accrued restructuring charges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2019
|
|
$
|
7,735
|
|
|
$
|
477
|
|
|
$
|
8,212
|
|
|
Charges
|
|
|
-
|
|
|
|
11,184
|
|
|
|
11,184
|
|
|
Cash payments
|
|
|
(4,651
|
)
|
|
|
(10,038
|
)
|
|
|
(14,689
|
)
|
|
Balances at June 30, 2020
|
|
$
|
3,084
|
|
|
$
|
1,623
|
|
|
$
|
4,707
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2018
|
|
$
|
15,578
|
|
|
$
|
3,974
|
|
|
$
|
19,552
|
|
|
Charges
|
|
|
1,921
|
|
|
|
4,161
|
|
|
|
6,082
|
|
|
Cash payments
|
|
|
(6,200
|
)
|
|
|
(3,162
|
)
|
|
|
(9,362
|
)
|
|
Balances at June 30, 2019
|
|
$
|
11,299
|
|
|
$
|
4,973
|
|
|
$
|
16,272
|
|
The Merger-related restructuring reserve is included in accrued expenses on the Condensed Consolidated Balance Sheets at June 30, 2020 and December 31, 2019.
The Merger-related restructuring and other charges on the Condensed Consolidated Statements of Loss for the six months ended June 30, 2020 includes other charges related to bankruptcy filing advisory fees incurred prior to the petition date, consulting and strategic costs of $23.7 million. For the six months ended June 30, 2019, other charges related to executive severance and benefits of $5.5 million are recorded in Restructuring and other charges on the Condensed Consolidated Statements of Loss. These other charges were recorded in Accrued expenses on the Condensed Consolidated Balance Sheet but not included in the above tables.
As a response to changing market conditions the Company has taken further action in the second quarter of 2020, which includes the idling of our Kermit and Utica facility, reducing productive capacity at several facilities, and reducing headcount across the Company.
22.Liabilities Subject to Compromise
As discussed in Note 1, “Basis of Presentation”, since the Petition Date, the Company has been operating as debtor-in-possession under the jurisdiction of the Bankruptcy Court and in accordance with provisions of the Bankruptcy Code. On the accompanying Condensed Consolidated Balance Sheet, the caption “Liabilities subject to compromise” reflects the expected allowed amount of the pre-petition claims that are not fully secured and that have at least a possibility of not being repaid at the full claim amount.
34
Covia Holdings Corporation and Subsidiaries
(Debtor-in-Possession)
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Liabilities subject to compromise at June 30, 2020 consisted of the following:
|
|
|
June 30, 2020
|
|
|
|
|
(in thousands)
|
|
|
Current liabilities
|
|
|
|
|
|
Current portion of long-term debt
|
|
$
|
1,570,544
|
|
|
Operating lease liabilities, current
|
|
|
59,320
|
|
|
Accounts payable
|
|
|
52,367
|
|
|
Accrued expenses
|
|
|
81,587
|
|
|
Total current liabilities
|
|
|
1,763,818
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
1,528
|
|
|
Operating lease liabilities, non-current
|
|
|
239,428
|
|
|
Other non-current liabilities
|
|
|
2,538
|
|
|
Total liabilities subject to compromise
|
|
$
|
2,007,312
|
|
Determination of the value at which liabilities will ultimately be settled cannot be made until the Bankruptcy Court approves the Plan. The Company will continue to evaluate the amount and classification of its pre-petition liabilities. Any additional liabilities that are subject to compromise will be recognized accordingly, and the aggregate amount of liabilities subject to compromise may change.
23.Reorganization Items, Net
Reorganization items incurred as a result of the Chapter 11 Cases are presented separately in the Condensed Consolidated Statements of Loss. For both the three and six months ended June 30, 2020, $24.3 million of deferred long-term debt fees on debt subject to compromise were written off. Deferred long-term debt fees and original issue discount are included in Reorganization items, net.
24.Condensed Consolidated Debtor-In-Possession Financial Information
The financial statements below represent the condensed consolidated financial statements of the Company Parties. Effective June 30, 2020, the results of the Company’s non-filing entities, which are comprised primarily of the Company's international entities, are not included in the Condensed Consolidated Balance Sheet. A Condensed Consolidated Statement of Loss and Condensed Consolidated Statement of Cash Flow are not presented as the one day period ended June 30, 2020 is not material.
Intercompany transactions among the Company Parties have been eliminated in the financial statements contained herein. Intercompany transactions among the Company Parties and the non-filing entities have not been eliminated in the Debtor’s Balance Sheet.
35
Covia Holdings Corporation and Subsidiaries
(Debtor-in-Possession)
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Debtors’ Balance Sheet
|
|
June 30, 2020
|
|
|
|
(in thousands)
|
|
|
Current assets
|
|
|
|
Cash and cash equivalents
|
$
|
|
216,030
|
|
|
Accounts receivable, net of allowance for doubtful accounts of $4,282 at June 30, 2020
|
|
|
82,204
|
|
|
Intercompany receivable
|
|
|
91,794
|
|
|
Inventories, net
|
|
|
90,281
|
|
|
Prepaid expenses and other current assets
|
|
|
65,141
|
|
|
Total current assets
|
|
|
545,450
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
|
885,083
|
|
|
Operating right-of-use assets, net
|
|
|
143,597
|
|
|
Goodwill
|
|
|
62,763
|
|
|
Intangibles, net
|
|
|
30,281
|
|
|
Investments
|
|
|
386,660
|
|
|
Other non-current assets
|
|
|
21,427
|
|
|
Total assets
|
$
|
|
2,075,261
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
Intercompany payable
|
$
|
|
137,740
|
|
|
Accrued expenses
|
|
|
26,508
|
|
|
Deferred revenue
|
|
|
14,398
|
|
|
Total current liabilities
|
|
|
178,646
|
|
|
|
|
|
|
|
|
Employee benefit obligations
|
|
|
36,804
|
|
|
Deferred tax liabilities, net
|
|
|
1,117
|
|
|
Other non-current liabilities
|
|
|
53,055
|
|
|
Liabilities subject to compromise
|
|
|
2,007,312
|
|
|
Total liabilities
|
|
|
2,276,934
|
|
|
Total equity
|
|
|
(201,673
|
)
|
|
Total liabilities and equity
|
$
|
|
2,075,261
|
|
25.Subsequent Events
Receivables Facility
In accordance with the Plan, on July 1, 2020, as part of the Plan and with the approval of the Bankruptcy Court, the Company terminated the Receivables Facility. In connection with the termination of the Receivables Facility, the Company repaid all of the outstanding obligations in respect of principal, interest and fees under the Receivables Facility and terminated and released all security interests and liens in the assigned receivables granted in connection therewith. With the approval of the Bankruptcy Court, the Receivables Facility was replaced with a letter of credit facility pursuant to an interim order of the Bankruptcy Court authorizing, among other things, (i) the Company’s funding of a new letter of credit collateral account held at Covia Financing, (ii) entry into the Payoff Agreement, (iii) the Company’s, Covia Financing’s and the Sub-Originators’ entry into, and performance of, their respective obligations under the Payoff Agreement and, as applicable, the Reimbursement Agreement for Cash-Collateralized Standby Letters of Credit and (iv) execution of the transactions contemplated by the Letter of Credit Agreements.
In July 2020, we cash collateralized approximately $37.0 million of our outstanding standby letters of credit.
36
Covia Holdings Corporation and Subsidiaries
(Debtor-in-Possession)
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Derivative Instruments
As discussed above, due to our variable-rate indebtedness, we are exposed to fluctuations in interest rates. Until the commencement of the Chapter 11 Cases on June 29, 2020, we used fixed interest rate swaps to manage this exposure. The filing of the Chapter 11 Cases constituted an event of default under the agreements governing such interest rate swaps, resulting in the acceleration of our outstanding indebtedness thereunder. See Note 1 and Note 8 to our condensed consolidated financial statements for further discussion.
Further, on July 2, 2020 and July 7, 2020, these financial instruments were terminated with the counterparties due to the aforementioned event of default on June 29, 2020.
NYSE Notice of Delisting Proceedings
On July 21, 2020, NYSE Regulation, Inc. filed a Form 25 with the SEC to delist Covia Holdings Corporation's common stock (the “common stock”) from the New York Stock Exchange at the opening of business on August 3, 2020. The deregistration of the common stock under Section 12(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), will be effective 90 days, or such shorter period as the SEC may determine, after filing of the Form 25. Upon deregistration of the common stock under Section 12(b) of the Exchange Act, the common stock will remain registered under Section 12(g) of the Exchange Act.
37