Warrior Met Coal, Inc. — Q2 2018 Form 10-Q
Business context and period. U.S. producer and exporter of metallurgical coal operating two underground Alabama mines. This unaudited filing covers the quarter and six months ended June 30, 2018, compared with the same 2017 periods.
Financial results
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Total revenue | $322.6 million | $363.4 million | $744.3 million | $617.3 million |
| Operating income | $101.1 million | $163.3 million | $288.4 million | $274.1 million |
| Net income | $91.3 million | $129.9 million | $270.0 million | $238.2 million |
| Net income per diluted share | $1.72 | $2.46 | $5.10 | $4.52 |
| Operating margin | 31.3% | 44.9% | 38.7% | 44.4% |
| Net margin | 28.3% | 35.7% | 36.3% | 38.6% |
Cash flow and liquidity. For the first half, operating cash flow was $326.3 million, capital expenditures were $55.4 million, and financing activities used $251.2 million. Cash and cash equivalents were $55.1 million at June 30; total available liquidity was $150.5 million, including $95.4 million available under the ABL Facility. No ABL borrowings were outstanding.
Debt and balance sheet. Total debt was $468.1 million, including $475.0 million principal amount of 8% senior secured notes due 2024 and a $2.3 million promissory note, net of debt discount. Long-term debt carrying value was $465.9 million. Asset retirement obligations were $98.3 million. Total assets were $1.03 billion and stockholders’ equity was $314.9 million.
Material changes versus prior periods
- Q2 revenue fell 11% and net income fell 30% year over year. Coal sales revenue declined $36.7 million, primarily from a $15.52 decrease in average selling price per metric ton and 51,000 fewer tons sold. Average selling price was $184.13 per ton versus $199.65.
- Q2 cash cost of sales rose to $103.51 per ton from $90.62, attributed to the mining ramp-up and a scheduled maintenance week. Operating income also reflected higher SG&A and interest expense.
- First-half revenue increased 21% and net income increased 13%. Coal volume sold rose to 3.631 million metric tons from 2.784 million, while average selling price declined to $200.47 from $212.94 per ton. Cash cost of sales increased to $101.12 per ton from $95.30.
- Interest expense increased to $9.8 million in Q2 and $18.3 million in the first half, mainly following the 2017 and March 2018 senior-note issuances. No income tax expense was recorded in 2018 because NOLs offset taxable income; 2017 included tax expense.
- Gross price realization was 100% for Q2 and 99% for the first half. The company changed its comparison benchmark in 2018 from the Australian LV Index to the Platts Premium LV FOB Australia Index, so year-over-year comparisons are not on the same benchmark basis.
Capital allocation, outlook, and risks
- The company issued $125 million principal amount of additional 8% notes in March 2018 and used the net proceeds, together with about $225 million of cash, to fund a $350 million special dividend paid April 20 ($6.53 per share). First-half dividends paid totaled $355.4 million.
- A $40 million stock-repurchase program was authorized in May. The company repurchased 500,000 shares for $12.1 million, leaving approximately $27.9 million authorized. Secondary offerings by existing stockholders raised no proceeds for the company.
- Management expected 2018 capital expenditures of $100–$120 million, including $70–$83 million sustaining and $30–$37 million discretionary spending. Discretionary projects include a new Mine No. 7 portal and operational improvements, with expected benefits primarily in 2019 and later. Blue Creek development spending was excluded.
- Management stated that cash, operating cash flow, and ABL availability should fund debt service and planned operating and capital needs for at least 12 months. This outlook depends on cash generation and access to financing.
- Key risks include volatility in met-coal prices and global steel demand, mining and equipment disruptions, transportation costs and minimum-throughput commitments, labor and regulatory matters, reclamation obligations, customer credit exposure, and debt covenants. The company reported covenant compliance and no liability recorded for minimum-throughput requirements. It reported no environmental accruals other than mine-reclamation obligations and no accruals for miscellaneous litigation.
- A regular $0.05-per-share quarterly dividend was declared in July for payment in August. The ABL Facility matures April 1, 2019; the $475 million senior notes mature November 1, 2024.
Important facts for investors to verify
- Whether coal prices, sales volumes, and cash costs support margins after the Q2 decline in price and increase in unit costs.
- The remaining funding needs and expected returns of the 2018 capital program, including timing of Mine No. 7 improvements and any decision on Blue Creek.
- Liquidity and refinancing plans ahead of the ABL Facility’s April 2019 maturity, along with compliance with debt restrictions and dividend or repurchase limitations.
- The sustainability of large shareholder distributions given the additional debt, reclamation obligations, and sensitivity to met-coal market conditions.