Covia Announces Third Quarter 2018 Results

  • Volumes of 8.2 million tons, down 19% sequentially, and revenues of $523 million, down 27% sequentially, both on a pro forma basis
  • Net loss of $289 million driven primarily by $295 million of pre-tax impairments, restructuring and merger-related charges
  • Adjusted EBITDA of $84.1 million, down 53% sequentially on a pro forma basis due to lower Energy volumes and pricing
  • Net cash flow provided by operating activities of $105 million
  • Solid Industrial segment gross profit results of $56.8 million
  • All in-basin plants online and expected to reach combined 8 million ton annual production capacity by first quarter of 2019 

INDEPENDENCE, Ohio, Nov. 14, 2018 (GLOBE NEWSWIRE) — Covia (NYSE:CVIA), a leading provider of mineral-based and material solutions for the Industrial and Energy markets, today announced results for the third quarter ended September 30, 2018. As a result of the merger that closed on June 1, 2018, Covia’s 2018 reported results, under U.S. generally accepted accounting principles (“GAAP”), include the consolidated financial results of both Unimin Corporation (“Unimin”) and Fairmount Santrol Holdings Inc. (“Fairmount Santrol”) for the four months ended September 30, 2018, as well as the stand-alone results for Unimin for the five months ended May 31, 2018, including the high-purity quartz (“HPQ”) business, which is reported as discontinued operations. Selected pro forma financial results, which reflect combined Unimin and Fairmount Santrol operations prior to the merger and exclude HPQ results, have been provided as exhibits with this release.

Third Quarter 2018 Results

  • Total volumes of 8.2 million tons, a decline of 15% compared to the third quarter of 2017 and down 19% sequentially, both on a pro forma basis, driven by lower Energy volumes.
  • Total revenues of $523.4 million, a decline of 17% compared to the third quarter of 2017 and down 27% sequentially, both on a pro forma basis, driven by lower Energy volumes and average selling prices.
  • Net loss from continuing operations of $288.8 million, or $2.20 per share, driven by the pre-tax impact of $265.3 million in non-cash impairment charges of goodwill and other assets, $24.1 million in restructuring charges, and $5.6 million in merger-related expenses.
  • Adjusted EBITDA of $84.1 million, a decline of 42% compared to the third quarter of 2017 and down 53% sequentially, both on a pro forma basis. Adjusted EBITDA includes $5.5 million in non-cash inventory charges related to purchase accounting and a $6.3 million negative impact from our in-basin facilities as a result of start-up costs and limited production.
  • Net cash flow provided by operating activities of $104.7 million aided by strong Industrial segment performance and reduced working capital.

“During the third quarter, our dedicated team members made substantial progress on our integration initiatives, including the realization of synergies, further delivering on our commitment to leverage the core strengths of Covia,” said Jenniffer Deckard, President and Chief Executive Officer. “We remained focused on expanding our Industrial business, while also taking decisive actions in response to challenges faced in our Energy segment.”

Ms. Deckard continued, “Our Industrial segment again posted solid quarterly results, with contributions from multiple markets, while our Energy segment’s results were adversely impacted by market conditions, which began to deteriorate in July. Exhaustion of operator budgets led a progressive slowdown in proppant demand, which is expected to continue through the end of the year before rebounding. At the same time, in-basin supply continued to grow, resulting in significant volume and pricing pressure. We also experienced some specific Energy customer challenges and had limited production from our new in-basin facilities during the third quarter.”

Ms. Deckard concluded, “We have taken significant actions to further strengthen Covia’s leadership position, including the idling of excess capacity and the consolidation of production into our lowest-cost plants, resulting in a more highly competitive footprint. Additionally, our 8 million tons of in-basin capacity is consistently ramping up to meet strong demand for this product. These actions better align our product offering with current market demand, and reduce our overall cost to serve. Further, we are making steady progress in strengthening and diversifying our customer mix, partnering with leading last-mile solutions providers, capturing merger-related synergies and growing our high cash-flow-yielding Industrial business.” 

Third Quarter 2018 Segment Results

Industrial Segment Results

  • Volumes of 3.7 million tons, relatively flat year-over-year on a pro forma basis.
  • Revenues of $198.8 million, up 3% year-over-year on a pro forma basis, driven by price increases instituted at the beginning of 2018.
  • Segment gross profit of $56.8 million, down $4.0 million, or 7%, year-over-year due to higher production costs in Mexico, hurricane-related disruptions in the Southeast United States and $1.4 million of non-cash inventory charges related to purchase accounting.

Energy Segment Results

  • Volumes of 4.5 million tons, down 28% sequentially on a pro forma basis, driven by softer demand for Northern White sand and limited production at the Company’s new West Texas facilities.
  • Revenues of $324.6 million, down 36% sequentially on a pro forma basis, driven by lower volumes and an average like-for-like price decrease on Northern White sand of approximately $6 per ton.
  • Segment gross profit of $61.0 million, down 62% sequentially on a pro forma basis, driven primarily by lower volumes, pricing, and fixed-cost leverage, resulting in segment gross profit per ton of approximately $13.60.
    • Segment gross profit for the third quarter included total charges of $17.1 million, or approximately $3.80 per ton resulting from inventory write-offs from idled facilities, losses from the in-basin facilities as a result of start-up costs and limited production, and non-cash inventory charges related to purchase accounting.

Further Reductions in Capacity and Costs

The Company plans to idle its two operating facilities in Voca, Texas by the end of January 2019, resulting in a decrease of 1.6 million tons of Texas Gold capacity. Since September, the Company has idled or announced plans to idle 4.9 million tons of Energy capacity. Existing demand from Northern White facilities has been transferred to the Company’s lower-cost plants. Remaining demand from Voca customers is expected to be transferred to Covia’s facilities in West Texas.

Capital Projects Update

  • The Company recently completed an expansion of its Canoitas facility in Mexico to add capacity and meet increasing demand from containerized glass customers. 
  • Covia’s Crane and Kermit in-basin facilities in West Texas commenced shipments in the middle of the third quarter of 2018 and sold a combined total of approximately 180,000 tons during the period. The two plants are expected to ramp up to their stated annual production capacity of 6 million tons by the end of the first quarter of 2019.
  • Covia’s new Seiling, Oklahoma in-basin facility began production in November 2018. This facility is expected to ramp up to its stated 2 million ton annual production capacity by the end of the first quarter of 2019.

Fourth Quarter 2018 Outlook

  • Industrial volumes are expected to be in the range of 3.4 million to 3.5 million tons, similar to the fourth quarter of 2017 on a pro forma basis.
  • Energy volumes are expected to be relatively flat sequentially and be in the range of 4.3 million to 4.5 million tons.
  • Selling, general and administrative expenses are expected to be approximately $45 million, which includes $3 million in non-cash stock compensation.
  • Capital expenditures are expected to be in the range of $50 million to $55 million.

Use of Certain Non-GAAP and Adjusted Financial Measures

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

Conference Call

Covia will host a conference call and live webcast for analysts and investors today, November 14, 2018, at 8:30 a.m. Eastern Time to discuss its financial results. Interested parties are invited to listen to a live audio webcast of the conference call, which will be accessible on the Investor Relations section of the Company’s website (ir.CoviaCorp.com). To access the live webcast, please log in 15 minutes prior to the start of the call to download and install any necessary audio software. An archived replay of the call will also be available on the website. The call may also be accessed live by dialing (866) 393-4306 or, for international callers, (734) 385-2616. The conference ID for the call is 2376299. A replay will be available on the website and can be accessed by dialing (855) 859-2056 or (404) 537-3406. The passcode for the replay is 2376299. The replay of the call will be available through November 21, 2018.

About Covia

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

Caution Concerning Forward-Looking Statements

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

Forward-looking statements are not guarantees of future performance and actual results may differ materially from those discussed in the forward-looking statements as a result of various factors, including, but not limited to: changes in prevailing economic conditions, including fluctuations in supply of, demand for, and pricing of, the Company’s products; potential business uncertainties relating to the merger, including potential disruptions to the Company’s business and operational relationships, the Company’s ability to achieve anticipated synergies, and the anticipated costs, timing and complexity of the Company’s integration efforts; loss of, or reduction in, business from the Company’s largest customers or their failure to pay the Company; possible adverse effects of being leveraged, including interest rate, event of default or refinancing risks, as well as potentially limiting the Company’s ability to invest in certain market opportunities; the Company’s ability to successfully develop and market new products; the Company’s rights and ability to mine its property and its renewal or receipt of the required permits and approvals from government authorities and other third parties; the Company’s ability to implement and realize efficiencies from capacity expansion plans, and cost reduction initiatives within its time and budgetary parameters; increasing costs or a lack of dependability or availability of transportation services or infrastructure and geographic shifts in demand; changing legislative and regulatory initiatives relating to the Company’s business, including environmental, mining, health and safety, licensing, reclamation and other regulation relating to hydraulic fracturing (and changes in their enforcement and interpretation); silica-related health issues and corresponding litigation; seasonal and severe weather conditions; other operating risks beyond the Company’s control; the risks discussed in the Risk Factors section of the Company’s Amendment No. 2 to Form S-4 Registration Statement on Form S-4 as filed with the Securities and Exchange Commission (“SEC”) on April 23, 2018; and the other factors discussed from time to time in the Company’s Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and other filings with the SEC. This release should be read in conjunction with such filings, and you should consider all of such risks, uncertainties and other factors carefully in evaluating forward-looking statements.

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

Investor contact: 
Matthew Schlarb
440-214-3284
[email protected]

 

                                 
                                 
Covia                                
Condensed Consolidated Statements of Income (Loss)                          
(unaudited)                                
    Three Months Ended September 30,     Nine Months Ended September 30,  
    2018     2017     2018     2017  
                         
    (in thousands, except per share
amounts)
    (in thousands, except per share
amounts)
 
             
Revenues   $ 523,368     $ 347,808     $ 1,401,607     $ 959,199  
Cost of goods sold (excluding depreciation, depletion,                                
and amortization shown separately)     405,602       244,694       1,021,232       694,110  
                                 
Operating expenses                                
Selling, general and administrative expenses(A)     43,164       24,210       99,765       66,255  
Depreciation, depletion and amortization expense     68,584       24,639       132,459       72,197  
Goodwill and other asset impairments     265,343             277,643        
Restructuring charges     14,750             14,750        
Other operating expense (income), net     (974 )     (6 )     (330 )     1,830  
Operating income (loss) from continuing operations     (273,101 )     54,271       (143,912 )     124,807  
                                 
Interest expense, net     23,530       5,104       35,325       12,634  
Other non-operating expense, net     9,043       1,374       56,159       4,449  
Income (loss) from continuing operations before provision (benefit) for income taxes     (305,674 )     47,793       (235,396 )     107,724  
                                 
Provision (benefit) for income taxes     (16,848 )     20,090       (524 )     36,460  
Net income (loss) from continuing operations     (288,826 )     27,703       (234,872 )     71,264  
Less: Net income (loss) from continuing operations attributable to the non-controlling interest     (32 )           74        
Net income (loss) from continuing operations attributable to Covia Holdings Corporation     (288,794 )     27,703       (234,946 )     71,264  
                                 
Income from discontinued operations, net of tax           2,441       12,587       12,521  
                                 
Net income (loss) attributable to Covia Holdings Corporation   $ (288,794 )   $ 30,144     $ (222,359 )   $ 83,785  
                                 
Continuing operations earnings (loss) per share                                
Basic   $ (2.20 )   $ 0.23     $ (1.90 )   $ 0.60  
Diluted     (2.20 )     0.23       (1.90 )     0.60  
                                 
Discontinued operations earnings per share                                
Basic           0.02       0.10       0.10  
Diluted           0.02       0.10       0.10  
                                 
Earnings (loss) per share                                
Basic     (2.20 )     0.25       (1.80 )     0.70  
Diluted   $ (2.20 )   $ 0.25     $ (1.80 )   $ 0.70  
                                 
Weighted average number of shares outstanding                                
Basic     131,154       119,645       123,604       119,645  
Diluted     131,154       119,645       123,604       119,645  
                                 
(A) – Stock compensation expense of $2,654 and $3,447 for the three and nine months ended September 30, 2018, respectively, is included within selling, general, and administrative expenses.  
   
   

Covia                
Condensed Consolidated Statements of Cash Flows                
(unaudited)                
    Nine Months Ended September 30,  
    2018     2017  
             
    (in thousands)  
Net income (loss) attributable to Covia Holdings Corporation   $ (222,359 )   $ 83,785  
Adjustments to reconcile net income (loss) to net cash provided by operating activities:                
Depreciation, depletion, and amortization     138,460       81,019  
Prepayment penalties on Senior Notes     2,213        
Goodwill and other asset impairments     277,643        
Restructuring charges, net of cash paid     14,327        
Inventory write-downs     6,744        
Gain on disposal of fixed assets     (90 )      
Change in fair value of interest rate swaps, net     (2,658 )      
Deferred income tax provision (benefit)     (9,234 )     6,172  
Stock compensation expense     5,847        
Net income from non-controlling interest     74        
Other, net     (3,226 )     188  
Change in operating assets and liabilities, net of business combination effect:                
Accounts receivable     53,533       (57,193 )
Inventories     10,511       9,333  
Prepaid expenses and other assets     (806 )     790  
Accounts payable     (32,628 )     (1,037 )
Accrued expenses     (48,091 )     3,438  
Net cash provided by operating activities     190,260       126,495  
                 
Cash flows from investing activities                
Proceeds from sale of fixed assets     862       413  
Capital expenditures     (188,424 )     (51,107 )
Cash of HPQ Co. distributed     (31,000 )      
Payments to Fairmount Santrol Holdings Inc. shareholders, net of cash acquired     (64,697 )      
Other investing activities           33  
Net cash used in investing activities     (283,259 )     (50,661 )
                 
Cash flows from financing activities                
Proceeds from borrowings on term loan     1,650,000       49,815  
Payments on Term Loan     (4,125 )      
Prepayment on Unimin Term Loans     (314,642 )     (221 )
Prepayment on Senior Notes     (100,000 )      
Prepayment on Fairmount Santrol Holdings Inc. term loan     (695,625 )      
Fees for Term Loan and Senior Notes prepayment     (36,733 )      
Payments on capital leases and other long-term debt     (35,574 )      
Fees for Revolver     (4,500 )      
Cash Redemption payment     (520,377 )      
Proceeds from share-based awards exercised or distributed     1        
Tax payments for withholdings on share-based awards exercised or distributed     (289 )      
Dividends paid           (50,000 )
Net cash used in financing activities     (61,864 )     (406 )
                 
Effect of foreign currency exchange rate changes     2,211       872  
Increase (decrease) in cash and cash equivalents     (152,652 )     76,300  
                 
Cash and cash equivalents:                
Beginning of period     308,059       183,361  
End of period   $ 155,407     $ 259,661  

                 
                 
Covia                
Condensed Consolidated Balance Sheets                
(unaudited)                
    September 30, 2018     December 31, 2017  
             
    (in thousands)  
Assets                
Current assets                
Cash and cash equivalents   $ 155,407     $ 308,059  
Accounts receivable, net     320,299       219,719  
Inventories, net     167,731       79,959  
Other receivables     31,373       27,963  
Prepaid expenses and other current assets     23,988       16,322  
Current assets of discontinued operations           66,906  
Total current assets     698,798       718,928  
                 
Property, plant and equipment, net     2,772,264       1,136,104  
Deferred tax assets, net     12,170       7,441  
Goodwill     135,763       53,512  
Intangibles, net     159,512       25,596  
Other non-current assets     25,733       2,416  
Non-current assets of discontinued operations           96,101  
Total assets   $ 3,804,240     $ 2,040,098  
                 
Liabilities and Equity                
Current liabilities                
Current portion of long-term debt   $ 20,126     $ 50,045  
Accounts payable     133,937       101,983  
Accrued expenses     104,147       88,208  
Current liabilities of discontinued operations           10,027  
Total current liabilities     258,210       250,263  
                 
Long-term debt     1,612,412       366,967  
Employee benefit obligations     97,136       97,798  
Deferred tax liabilities, net     252,240       62,614  
Other non-current liabilities     98,841       29,057  
Non-current liabilities of discontinued operations           8,084  
Total liabilities     2,318,839       814,783  
                 
Equity                
Common stock     1,777       1,777  
Additional paid-in capital     385,513       43,941  
Retained earnings     1,696,098       1,918,457  
Accumulated other comprehensive loss     (113,333 )     (128,228 )
Treasury stock at cost     (485,181 )     (610,632 )
Non-controlling interest     527        
Total equity     1,485,401       1,225,315  
Total liabilities and equity   $ 3,804,240     $ 2,040,098  

                                         
                                         
Covia                                        
Pro Forma Segment Information                                  
(unaudited)                                        
(in thousands)                                        
    Three Months Ended September 30,  
    2018     2017  
    Covia, As
Reported
        Covia, As Reported   Fairmount
Santrol Pre-
Merger(1)
  Covia Pro
Forma
Combined(2)
 
Volumes (tons)                                        
Energy     4,497           3,081     2,832     5,913  
Industrial     3,680           3,101     615     3,716  
Total volumes     8,177           6,182     3,447     9,629  
                                         
Revenues                                        
Energy   $ 324,606         $ 185,693   $ 249,751   $ 435,444  
Industrial     198,762           162,115     30,299     192,414  
Total revenues     523,368           347,808     280,050     627,858  
                                         
Segment gross profit(3)                                        
Energy     60,961           55,940     80,542     136,482  
Industrial     56,805           47,174     13,663     60,837  
Total segment gross profit   $ 117,766         $ 103,114   $ 94,205   $ 197,319  
                                         
    Nine Months Ended September 30,  
    2018     2017  
    Covia, As
Reported
  Fairmount
Santrol Pre-
Merger(1)
  Covia Pro
Forma
Combined(2)
    Covia, As
Reported
  Fairmount
Santrol Pre-
Merger(1)
  Covia Pro
Forma
Combined(2)
 
Volumes (tons)                                        
Energy     11,747     4,588     16,335       8,362     7,501     15,863  
Industrial     9,997     1,048     11,045       9,188     1,897     11,085  
Total volumes     21,744     5,636     27,380       17,550     9,398     26,948  
                                         
Revenues                                        
Energy   $ 858,813   $ 421,526   $ 1,280,339     $ 473,299   $ 589,556   $ 1,062,855  
Industrial     542,794     55,805     598,599       485,900     96,303     582,203  
Total revenues     1,401,607     477,331     1,878,938       959,199     685,859     1,645,058  
                                         
Segment gross profit(3)                                        
Energy     227,744     136,668     364,412       122,004     158,235     280,239  
Industrial     152,631     21,440     174,071       143,085     41,774     184,859  
Total segment gross profit   $ 380,375   $ 158,108   $ 538,483     $ 265,089   $ 200,009   $ 465,098  
                                         
    Three Months Ended June 30,  
    2018     2017  
    Covia, As
Reported
  Fairmount
Santrol Pre-
Merger(1)
  Covia Pro
Forma
Combined(2)
    Covia, As
Reported
  Fairmount
Santrol Pre-
Merger(1)
  Covia Pro
Forma
Combined(2)
 
Volumes (tons)                                        
Energy     4,274     1,953     6,227       2,819     2,587     5,406  
Industrial     3,346     470     3,816       3,119     687     3,806  
Total volumes     7,620     2,423     10,043       5,938     3,274     9,212  
                                         
Revenues                                        
Energy   $ 326,746   $ 179,345   $ 506,091     $ 157,383   $ 198,812   $ 356,195  
Industrial     181,672     24,649     206,321       166,696     34,414     201,110  
Total revenues     508,418     203,994     712,412       324,079     233,226     557,305  
                                         
Segment gross profit(3)                                        
Energy     101,288     60,553     161,841       40,616     52,233     92,849  
Industrial     51,819     10,294     62,113       52,318     15,191     67,509  
Total segment gross profit   $ 153,107   $ 70,847   $ 223,954     $ 92,934   $ 67,424   $ 160,358  
__________                                        
                                         
(1) 2018 Fairmount Santrol Pre-Merger financial results for the nine months ended September 30, 2018 are for Fairmount Santrol Holdings Inc. (“Fairmount Santrol”), for the five months ended May 31, 2018, the day before the merger between Fairmount Santrol and Unimin Corporation (“Unimin”) occurred on June 1, 2018.  2018 Fairmount Santrol Pre-merger financial results for the three months ended June 30, 2018 are for the two months ended May 31, 2018.  Such results are based on Fairmount Santrol’s unaudited internal financial statements and have been prepared on a basis substantially consistent with Fairmount Santrol’s prior audited financial statements, but have not been reviewed by the Company’s independent auditors.  Both Fairmount Santrol and Unimin reported financial results on a calendar fiscal year.  2017 Fairmount Santrol Pre-Merger financial results are for Fairmount Santrol for the three and nine months ended September 30, 2017 and three months ended June 30, 2017, as previously reported by Fairmount Santrol.  
                                         
(2) The unaudited Covia Pro Forma Combined financial results include the aggregate results of operations for legacy Fairmount Santrol and legacy Unimin including periods preceding the June 1, 2018 merger in addition to the Covia, As Reported results for periods on and after the date of the merger.  
                                         
(3) As a result of the June 1, 2018 merger, legacy Fairmount Santrol inventories were written up to fair value under Generally Accepted Accounting Principles (“GAAP”).  For the three months ended September 30, 2018, $5.5 million of this write-up was expensed through cost of sales thereby reducing segment gross profit.  Of this $5.5 million for the three months ended September 30, 2018, $4.1 million and $1.4 million impacted the Energy and Industrial segments, respectively.  For the nine months ended September 30, 2018, $24.7 million of this write-up was expensed through cost of sales thereby reducing segment gross profit.  Of this $24.7 million for the nine months ended September 30, 2018, $22.1 million and $2.6 million impacted the Energy and Industrial segments, respectively.  For the three months ended June 30, 2018, $19.2 million of this write-up was expensed through cost of sales thereby reducing segment gross profit.  Of this $19.2 million, $18.0 million and $1.2 million impacted the Energy and Industrial segments, respectively.

Additionally, for the three and nine months ended September 30, 2018, the Company recognized $6.7 million of impairment charges in the Energy segment cost of sales, related to inventories located at recently idled facilities, thereby reducing segment gross profit. 

In the three and nine months ended September 30, 2018, Energy segment gross profit included $6.3 million in losses from the in basin facilities due to start-up costs and lower fixed cost leverage associated with scaling production, and $13.4 million in plant start up costs from these facilities, respectively.  In the three months ended June 30, 2018, Energy segment gross profit included $7.1 million in start up costs from the in basin facilities.

 

                                                     
                                                     
Covia                                                    
Pro Forma Net Income Information & Reconciliation to Non-GAAP Measures (unaudited)  
The following table reconciles EBITDA and Adjusted EBITDA, non-GAAP financial measures, to the most directly comparable GAAP
measure, net income (loss) from continuing operations (amounts in thousands)
 
                                                     
    Three Months Ended September 30,  
    2018     2017  
    As
Reported
  Fairmount
Santrol
Pre-
Merger
  Merger Pro
Forma
Adjustments(1)
  Covia Pro
Forma
Combined(2)
    As
Reported
  Fairmount
Santrol
Pre-
Merger(3)
  Merger Pro
Forma
Adjustments(1)
  Covia Pro
Forma
Combined(2)
 
Revenues   $ 523,368     $   $ 523,368     $ 347,808   $ 280,050   $   $ 627,858  
Cost of goods sold (excluding depreciation, depletion,                                                    
and amortization shown separately)(4)     405,602           405,602       244,694     185,845         430,539  
                                                     
Operating expenses                                                    
Selling, general and administrative expenses     43,164           43,164       24,210     31,105     (1,333 )   53,982  
Depreciation, depletion and amortization expense     68,584       (10,392 )   58,192       24,639     17,497     14,206     56,342  
Goodwill and other asset impairments     265,343           265,343                    
Restructuring charges     14,750           14,750                    
Other operating expense (income), net     (974 )         (974 )     (6 )   (1,594 )       (1,600 )
Operating income (loss) from continuing operations     (273,101 )     10,392     (262,709 )     54,271     47,197     (12,873 )   88,595  
                                                     
Interest expense, net     23,530       (372 )   23,158       5,104     12,110     9,429     26,643  
Other non-operating expense, net     9,043       (5,600 )   3,443       1,374             1,374  
Income (loss) from continuing operations before provision (benefit) for income taxes     (305,674 )     16,364     (289,310 )     47,793     35,087     (22,302 )   60,578  
                                                     
Provision (benefit) for income taxes     (16,848 )     3,764     (13,084 )     20,090     1,156     (8,252 )   12,994  
Net income (loss) from continuing operations     (288,826 )     12,600     (276,226 )     27,703     33,931     (14,050 )   47,584  
Less: Net income (loss) from continuing operations attributable to the non-controlling interest     (32 )         (32 )         (25 )       (25 )
Net income (loss) from continuing operations attributable to Covia Holdings Corporation     (288,794 )     12,600     (276,194 )     27,703     33,956     (14,050 )   47,609  
                                                     
Interest expense, net     23,530       (372 )   23,158       5,104     12,110     9,429     26,643  
Provision (benefit) for income taxes     (16,848 )     3,764     (13,084 )     20,090     1,156     (8,252 )   12,994  
Depreciation, depletion and amortization expense     68,584       (10,392 )   58,192       24,639     17,497     14,206     56,342  
EBITDA     (213,528 )     5,600     (207,928 )     77,536     64,719     1,333     143,588  
                                                     
Non-cash stock compensation expense(5)     2,654           2,654           2,402         2,402  
Costs and expenses related to the Merger(6)     5,600       (5,600 )             1,333     (1,333 )    
Restructuring expenses(7)     24,061           24,061                    
Goodwill and other asset impairments(8)     265,343           265,343                    
Adjusted EBITDA   $ 84,130     $   $ 84,130     $ 77,536   $ 68,454   $   $ 145,990  
                                                     
    Nine Months Ended September 30,  
    2018     2017  
    As
Reported
  Fairmount
Santrol
Pre-
Merger(1)
  Merger Pro
Forma
Adjustments(1)
  Pro Forma
Combined(2)
    As
Reported
  Fairmount
Santrol
Pre-
Merger(3)
  Merger Pro
Forma
Adjustments(1)
  Pro Forma
Combined(2)
 
Revenues   $ 1,401,607   $ 477,332   $   $ 1,878,939     $ 959,199   $ 685,859   $   $ 1,645,058  
Cost of goods sold (excluding depreciation, depletion,                                                    
and amortization shown separately)(4)     1,021,232     319,224         1,340,456       694,110     485,850         1,179,960  
                                                     
Operating expenses                                                    
Selling, general and administrative expenses     99,765     44,156         143,921       66,255     79,438     (1,477 )   144,216  
Depreciation, depletion and amortization expense     132,459     29,313     1,587     163,359       72,197     51,999     46,422     170,618  
Goodwill and other asset impairments     277,643             277,643                    
Restructuring charges     14,750             14,750                    
Other operating expense (income), net     (330 )   (2,292 )       (2,622 )     1,830     (2,299 )       (469 )
Operating income (loss) from continuing operations     (143,912 )   86,931     (1,587 )   (58,568 )     124,807     70,871     (44,945 )   150,733  
                                                     
Interest expense, net     35,325     25,686     8,799     69,810       12,634     37,630     31,059     81,323  
Other non-operating expense, net     56,159     28,057     (77,880 )   6,336       4,449             4,449  
Income (loss) from continuing operations before provision (benefit) for income taxes     (235,396 )   33,188     67,494     (134,714 )     107,724     33,241     (76,004 )   64,961  
                                                     
Provision (benefit) for income taxes     (524 )   1,683     15,524     16,683       36,460     481     (28,121 )   8,820  
Net income (loss) from continuing operations     (234,872 )   31,505     51,970     (151,397 )     71,264     32,760     (47,883 )   56,141  
Less: Net income (loss) from continuing operations attributable to the non-controlling interest     74     3         77           193         193  
Net income (loss) from continuing operations attributable to Covia Holdings Corporation     (234,946 )   31,502     51,970     (151,474 )     71,264     32,567     (47,883 )   55,948  
                                                     
Interest expense, net     35,325     25,686     8,799     69,810       12,634     37,630     31,059     81,323  
Provision (benefit) for income taxes     (524 )   1,683     15,524     16,683       36,460     481     (28,121 )   8,820  
Depreciation, depletion and amortization expense     132,459     29,313     1,587     163,359       72,197     51,999     46,422     170,618  
EBITDA     (67,686 )   88,184     77,880     98,378       192,555     122,677     1,477     316,709  
                                                     
Non-cash stock compensation expense(5)     3,447     8,482         11,929           7,582         7,582  
Costs and expenses related to the Merger(6)     49,823     28,057     (77,880 )             1,477     (1,477 )    
Restructuring expenses(7)     24,061             24,061                    
Goodwill and other asset impairments(8)     277,643             277,643                    
Write-off of deferred financing costs(9)                           389         389  
Adjusted EBITDA   $ 287,288   $ 124,723   $   $ 412,011     $ 192,555   $ 132,125   $   $ 324,680  
                                                     
    Three Months Ended June 30,  
    2018     2017  
    As
Reported
  Fairmount
Santrol
Pre-
Merger(1)
  Merger Pro
Forma
Adjustments(1)
  Pro Forma
Combined(2)
    As
Reported
  Fairmount
Santrol
Pre-
Merger(3)
  Merger Pro
Forma
Adjustments(1)
  Pro Forma
Combined(2)
 
Revenues   $ 508,418   $ 203,994   $   $ 712,412     $ 324,079   $ 233,226   $   $ 557,305  
Cost of goods sold (excluding depreciation, depletion,                                                    
and amortization shown separately)(4)     355,311     133,146         488,457       231,145     165,802         396,947  
                                                     
Operating expenses                                                    
Selling, general and administrative expenses     31,377     20,137         51,514       21,220     25,719         46,939  
Depreciation, depletion and amortization expense     36,744     12,088     5,971     54,803       23,896     17,256     9,832     50,984  
Other operating expense, net     12,944     (1,563 )       11,381       813     355         1,168  
Operating income from continuing operations     72,042     40,186     (5,971 )   106,257       47,005     24,094     (9,832 )   61,267  
                                                     
Interest expense, net     7,965     11,903     4,907     24,775       3,654     12,983     8,154     24,791  
Other non-operating expense, net     40,455     24,723     (63,646 )   1,532       1,596     144     (144 )   1,596  
Income from continuing operations before provision for income
taxes
    23,622     3,560     52,768     79,950       41,755     10,967     (17,842 )   34,880  
                                                     
Provision for income taxes     6,454     872     11,063     18,389       11,566     520     (10,464 )   1,622  
Net income from continuing operations     17,168     2,688     41,705     61,561       30,189     10,447     (7,378 )   33,258  
Less: Net income from continuing operations attributable to the non-
controlling interest
    106             106           40         40  
Net income from continuing operations attributable to Covia
Holdings Corporation
    17,062     2,688     41,705     61,455       30,189     10,407     (7,378 )   33,218  
                                                     
Interest expense, net     7,965     11,903     4,907     24,775       3,654     12,983     8,154     24,791  
Provision for income taxes     6,454     872     11,063     18,389       11,566     520     (10,464 )   1,622  
Depreciation, depletion and amortization expense     36,744     12,088     5,971     54,803       23,896     17,256     9,832     50,984  
EBITDA     68,225     27,551     63,646     159,422       69,305     41,166     144     110,615  
                                                     
Non-cash stock compensation expense(5)     793     5,063         5,856           2,763         2,763  
Costs and expenses related to the Merger(6)     38,923     24,723     (63,646 )             144     (144 )    
Goodwill and other asset impairments(8)     12,300             12,300                    
Write-off of deferred financing costs(9)                           389         389  
Adjusted EBITDA   $ 120,241   $ 57,337   $   $ 177,578     $ 69,305   $ 44,462     $ 113,767  
__________                                                    
                                                     
(1) The unaudited pro forma condensed financial information presents the Company’s combined results as if the Merger had occurred on January 1, 2017.  The pro forma financial information was prepared to give effect to events that are (i) directly attributable to the Merger; (ii) factually supportable; and (iii) expected to have a continuing impact on the Company’s results.  All material intercompany transactions during the periods presented have been eliminated.  These pro forma results include adjustments for interest expense that would have been incurred to finance the transaction and reflect purchase accounting adjustments for additional depreciation, depletion and amortization on acquired property, plant and equipment and intangible assets in prior periods which resulted in a reduction to depreciation, depletion and amortization in the current periods.  The pro forma results exclude Merger related transaction costs and expenses that were incurred in conjunction with the transaction for all periods presented.  2018 Fairmount Santrol Pre-Merger financial results for the nine months ended September 30, 2018 are for Fairmount Santrol Holdings Inc. (“Fairmount Santrol”), for the five months ended May 31, 2018, the day before the merger between Fairmount Santrol and Unimin Corporation (“Unimin”) occurred on June 1, 2018.  2018 Fairmount Santrol Pre-merger financial results for the three months ended June 30, 2018 are for the two months ended May 31, 2018.  
                                                     
(2) The unaudited Covia Pro Forma Combined financial results include the aggregate results of operations for legacy Fairmount Santrol and legacy Unimin including periods preceding the June 1, 2018 merger in addition to the Covia, As Reported results for periods on and after the date of the merger.  
                                                     
(3) 2017 Fairmount Santrol Pre-Merger financial results are for Fairmount Santrol for the three and nine months ended September 30, 2017 and three months ended June 30, 2017, as previously reported by Fairmount Santrol.  
                                                     
(4) As a result of the June 1, 2018 merger, legacy Fairmount Santrol inventories were written up to fair value under GAAP.  For the three months ended September 30, 2018, $5.5 million of this write-up was expensed through cost of sales.  For the nine months ended September 30, 2018, $24.7 million of this write-up was expensed through cost of sales.  For the three months ended June 30, 2018, $19.2 million of this write-up was expensed through cost of sales. 

Additionally, for the three and nine months ended September 30, 2018, the Company recognized $6.7 million of impairment charges in cost of sales, related to inventories located at recently idled facilities. 

In the three and nine months ended September 30, 2018, cost of sales included $6.3 million in losses from our in basin facilities due to start-up costs and lower fixed cost leverage associated with scaling production, and $13.4 million in plant start up costs from these facilities, respectively.  In the three months ended June 30, 2018, cost of sales included $7.1 million in start up costs from the in basin facilities.

 
                                                     
(5) Represents the non-cash expense for stock-based awards issued to employees and outside directors.  Stock compensation expenses are reported in Selling, general & administrative expenses (“SG&A”).  
                                                     
(6) Costs and expenses related to the Merger with Fairmount Santrol include legal, accounting, financial advisory services, severance, debt extinguishment, and other expenses.  Additionally, it includes stock compensation expense related to accelerated awards as a result of the Merger.  
                                                     
(7) Represents expenses associated with restructuring activities as a result of the merger and idled plant facilities, including, inventory write-offs, pension and severance expenses, in addition to other liabilities recognized.  The inventory write-offs of $6.7 million are recorded in cost of goods sold.  The pension related expenses of $2.6 million are recorded in Other non-operating expense, net.  
                                                     
(8) Represents expenses associated with the impairment of goodwill in the Energy segment and the impairment of assets from recently idled facilities for the three and nine months ended September 30, 2018.  Also includes charges from a terminated project for the nine months ended September 30, 2018 due to post-Merger synergies and capital optimization.  
                                                     
(9) Represents the write-off of deferred financing fees in relation to the term loan prepayment for legacy Fairmount Santrol for the three months ended June 30, 2017 and the nine months ended September 30, 2017.