Warrior Met Coal, Inc. — Q1 2018 Form 10-Q
Business and period: U.S. producer and exporter of metallurgical coal operating two underground mines in Alabama. This unaudited report covers the three months ended March 31, 2018; comparisons are with Q1 2017. The company reports one mining segment.
Financial performance
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Revenue | $421.8 million | $254.0 million |
| Operating income | $187.3 million | $110.9 million |
| Net income | $178.7 million; $3.36 per diluted share | $108.3 million; $2.06 per diluted share |
| Operating margin | 44.4% | 43.6% |
| Net margin | 42.4% | 42.6% |
| Operating cash flow | $193.7 million | $65.6 million |
| Capital expenditures | $22.5 million | $11.4 million |
| Segment Adjusted EBITDA | $222.2 million | $134.9 million |
| Adjusted EBITDA | $216.4 million | $135.5 million |
At March 31, 2018, cash and cash equivalents were $322.0 million, short-term investments were $17.5 million, and ABL availability was $100.0 million; the company reported total available liquidity of $422.0 million. It had no ABL borrowings. Total debt carrying value was $468.5 million, including $465.5 million long-term debt and $3.0 million current debt. Total liabilities were $716.7 million and stockholders’ equity was $584.9 million.
Material changes and drivers
- Revenue increased 66%, primarily as coal sales volume rose by 898,000 metric tons to 1.920 million tons, reflecting production ramp-up at Mines No. 4 and No. 7. Production was 1.904 million tons.
- Average selling price declined to $215.04 per ton from $235.87. Management attributed the revenue increase to higher volume, partly offset by the lower price. Cash cost of sales per ton improved to $98.98 from $103.34.
- Gross price realization was reported at 99% versus 84%; the company changed its comparison benchmark in 2018 from the Australian HCC Benchmark to the Platts Premium LV FOB Australia Index, so the percentages are not directly comparable.
- Interest expense rose to $8.6 million from $0.6 million, mainly following the issuance of senior notes. Q1 2018 income tax expense was zero because NOLs offset taxable income; Q1 2017 tax expense was $1.9 million.
- Cash increased substantially during the quarter, with the $126.9 million net-note proceeds contributing to financing cash flow. Operating cash flow also rose, alongside higher earnings; receivables increased with sales volume.
Debt, distributions, outlook and risks
- On March 1, 2018, the company issued $125 million principal amount of additional 8.00% senior secured notes due 2024 at 103% of principal. Together with $350 million of existing notes, reported face principal was $475 million. The ABL Facility matures April 1, 2019; the company was in covenant compliance and not subject to its springing fixed-charge coverage test at quarter-end.
- After quarter-end, the company paid a $350 million special dividend ($6.53 per share) on April 20, funded with note proceeds and approximately $225 million of cash on hand. The cash and liquidity figures above are as of March 31 and do not reflect that payment. A regular $0.05-per-share dividend was also declared for payment in May.
- On May 2, 2018, the board authorized a share repurchase program of up to $40 million, with no required purchase amount or expiration date. Repurchases are discretionary and subject to debt-agreement restrictions and other conditions.
- Management forecast 2018 capital spending of $100–$120 million, including $70–$83 million sustaining and $30–$36 million discretionary spending. The discretionary program includes Mine No. 7 portal work and operational improvements; expected benefits are primarily in 2019 and later. The estimate excludes potential development spending for Blue Creek.
- Management stated that operating cash flow, balance-sheet cash and ABL availability were expected to fund debt service and planned operating and capital needs for at least the next 12 months. This outlook is subject to met-coal prices and demand, production and mining risks, costs, transportation, liquidity and access to financing.
- Other notable exposures include XCoal, which accounted for approximately 24.8% of Q1 revenue, up from 6.4% a year earlier; coal-price volatility; mine reclamation obligations; and customer, environmental, regulatory, labor and operational risks. The company had $44.7 million of reclamation surety bonds and $2.1 million of letters of credit for miscellaneous purposes. It reported no accrued environmental matters beyond asset retirement obligations and no accrued miscellaneous litigation at quarter-end.
- The company adopted the new revenue standard on January 1, 2018 and said it did not materially affect its financial statements or change revenue-recognition timing. It reported effective disclosure controls and no material change in internal control during the quarter.
Key facts for investors to verify
- How the April $350 million special dividend affects post-quarter cash, leverage, interest burden and capacity for planned capital spending and future distributions.
- Whether coal sales volumes and mine production can be sustained, and how lower realized prices or weaker global steel demand could affect margins and cash generation.
- The comparability and calculation of gross price realization after the benchmark change; also confirm the filing’s differing benchmark methodology between periods.
- Customer concentration and the terms and volume commitments of the XCoal arrangement.
- Actual 2018 capital expenditures, progress and returns from Mine No. 7 improvements, and any decision to develop Blue Creek.
- The filing’s statement-of-operations dividend-per-share row lists $0.05 for 2018 and $3.56 for 2017, while the notes describe the 2017 $3.56 amount as a special distribution and the 2018 $0.05 amount as the regular quarterly dividend; verify the differing nature of those payments when making comparisons.