Warrior Met Coal, Inc. — 2017 Form 10-K
Business context and reporting period. Annual report for the fiscal year ended December 31, 2017, filed February 14, 2018. Warrior is a U.S. producer and exporter of premium metallurgical coal, operating two underground mines in Alabama; substantially all coal sales serve international steelmakers. Results are reported as one segment. The company completed its corporate conversion in April 2017 and an IPO in which selling stockholders—not the company—received the proceeds.
Key financial metrics
| Metric | 2017 |
|---|---|
| Total revenue | $1,169.1 million; coal sales were $1,124.6 million |
| Operating income and margin | $423.4 million; 36.2% |
| Net income and diluted EPS | $455.0 million; $8.62 per share |
| Adjusted EBITDA | $517.7 million (non-GAAP) |
| Coal produced / sold | 6.091 million / 5.921 million metric tons |
| Average net selling price / cash cost of sales | $189.94 / $99.86 per metric ton |
| Operating cash flow | $434.5 million |
| Investing cash flow / capital expenditures | $(92.6) million; primarily capital expenditures |
| Financing cash flow | $(458.3) million |
| Cash and available ABL borrowing capacity | $35.5 million cash plus $100.0 million availability; $135.5 million stated available liquidity |
| Debt | $345.9 million carrying value at year-end, including $350.0 million face amount of 8.00% secured notes due 2024 and a $3.7 million promissory note; no ABL borrowings |
| Working capital | $163.6 million, excluding current portion of long-term debt |
Net income included a $38.6 million income tax benefit. The company also reported $39.3 million of AMT credits as a tax receivable, expected to be refunded over 2019–2022. These tax items and the company’s NOL position are important when assessing earnings and future cash taxes.
Material changes versus prior periods
- Revenue rose sharply as met coal prices and production increased. The filing’s headline prior Successor comparison covers only the nine months ended December 31, 2016, while 2017 covers twelve months; moreover, the 2016 Predecessor and Successor periods use different accounting bases. These periods are not directly comparable.
- Against the nine-month 2016 Successor period, 2017 produced substantially higher revenue and operating cash flow; the company reported a $49.7 million net loss for that nine-month period. Production was 6.091 million tons in 2017 versus 2.294 million in the 2016 nine-month period, and average net selling price was $189.94 versus $115.67 per ton.
- The quarterly 2017 pattern was uneven: revenue peaked at $363.4 million in Q2 and declined to $239.8 million in Q4; Q4 operating income was $66.5 million and net income $97.2 million. Management attributed lower Q4 production and higher unit cash costs partly to three longwall moves.
- Beginning in Q2 2017, industry pricing moved from the quarterly Australian HCC Benchmark to index-based pricing. Full-year gross price realization was 96%; realization for the final nine months was 100%.
- The company issued $350.0 million of 8.00% notes in November and paid a roughly $600.0 million special dividend, funded with note proceeds and approximately $260.0 million of cash. Total dividends and distributions paid in 2017 were $796.9 million.
Outlook, commentary, risks and unusual items
- Management expects 2018 capital spending of $100–$120 million: approximately $70–$83 million sustaining and $30–$36 million discretionary. The discretionary program includes completing a new Mine No. 7 portal; much of the anticipated benefit is expected in 2019 and later. Blue Creek development spending is excluded.
- Management stated that cash, operating cash flow and ABL availability should fund debt service and planned operating and capital needs for at least twelve months. It targets minimum liquidity of $100 million and normalized EBITDA leverage of 1.50–2.00x; these are stated financial objectives, not guarantees.
- Operating mines had about 110.0 million metric tons of recoverable reserves; the undeveloped Blue Creek project had about 103.0 million. Current combined annual production capacity is estimated at 7.3 million tons. Blue Creek development would require significant additional investment and is conditional on market conditions.
- Key exposures include volatile met coal prices and steel demand, concentration in Alabama and in a small number of customers (the five largest represented about 53% of 2017 sales), reliance on rail and port logistics, mine geology and equipment, labor, permits, environmental and safety regulation, and reclamation and black-lung liabilities.
- The company reported $31.9 million of estimated black-lung liabilities, net of the trust, and $99.7 million of asset-retirement obligations. Reclamation surety bonds totaled $38.1 million, with an additional $2.1 million for miscellaneous purposes. Management said ordinary-course litigation was not expected to materially affect results; no miscellaneous litigation accrual was recorded at year-end.
- The IRS issued a favorable private letter ruling concerning use of NOLs, but a qualifying ownership change before April 1, 2018 could reduce NOLs to zero. The company also reported a $312.5 million valuation allowance against deferred tax assets. Tax accounting under the 2017 Tax Cuts and Jobs Act remained provisional.
- Management reported disclosure controls were effective and that two previously identified material weaknesses had been remediated in Q1 2017. The 10-K did not include management’s internal-control assessment or auditor attestation, citing the transition period for newly public companies; auditor attestation was expected beginning with the 2018 10-K.
Important facts for investors to verify
- Whether coal prices, realized pricing and production sustain the strong 2017 levels, particularly after Q4 longwall moves and under index-based contract pricing.
- Whether the 2018 capital plan is delivered within guidance and produces the expected operating improvements, without impairing liquidity or increasing debt needs.
- The cash cost and terms of the 8.00% notes, refinancing or repayment needs, ABL availability and covenant headroom; the ABL facility matures in April 2019.
- The validity and practical usability of NOLs, timing and amount of AMT refunds, and any subsequent ownership change that could affect tax attributes.
- Customer concentration, contract renewals, export logistics capacity, and the company’s ability to maintain required reclamation bonds and meet environmental, black-lung and mine-closure obligations.