Business context and reporting period
Warrior Met Coal, Inc. is a U.S. producer and exporter of premium metallurgical coal, operating two underground mines in Alabama; it also earns natural gas and royalty revenue. This Form 10-Q covers the quarter ended March 31, 2017. The company converted from an LLC to a corporation on April 12, 2017, and completed its IPO on April 19.
Comparisons with Q1 2016 require caution: Q1 2017 is reported on a Successor basis after the March 2016 asset acquisition, while Q1 2016 is a carved-out Predecessor period under a different accounting basis. The prior period also included an idle Mine No. 4 and only one operating longwall at Mine No. 7.
Financial and operating performance
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Total revenue | $254.0 million | $71.4 million |
| Operating income (loss) | $110.9 million | ($53.2 million) |
| Net income (loss) | $108.3 million | ($61.8 million) |
| Operating margin | 43.6% | (74.5%) |
| Met coal sold / produced | 1.022 / 1.464 million metric tons | 0.777 / 0.801 million metric tons |
| Average selling price per metric ton | $235.87 | $83.85 |
| Cash cost of sales per metric ton | $103.34 | $69.74 |
| Adjusted EBITDA | $135.5 million | ($9.0 million) |
| Operating cash flow | $65.6 million | ($40.7 million) |
Q1 2017 cost of sales was $106.1 million; depreciation and depletion was $14.6 million, SG&A $5.2 million, and IPO-related transaction costs $9.0 million. Other revenue of $12.9 million included a $2.8 million gain from natural gas swap fair-value changes. Cash flow from operations included a $58.1 million working-capital outflow, mainly from higher receivables and inventories.
Investing cash outflow was $11.4 million, primarily capital expenditures. Financing cash outflow was $190.8 million, principally the $190.0 million special distribution paid March 31. Cash and cash equivalents fell to $13.5 million from $150.0 million at December 31, 2016.
Financial position and material changes
At March 31, 2017, total assets were $865.9 million and stockholders’ equity was $667.8 million. Total debt was $5.9 million, including $2.9 million current. The $100 million ABL Facility had no borrowings outstanding and $82.4 million available; reported liquidity, including cash, was $95.9 million. The company reported compliance with applicable ABL covenants and was not subject to its springing fixed-charge coverage test.
Revenue, profitability, sales volume, and realized coal prices were substantially higher than in the prior-year quarter, while cash cost per ton also increased. These changes reflect both improved operating conditions and the non-comparable accounting and operating bases. Q1 2017 included both mines operating, while Q1 2016 included Mine No. 4 idle costs, restructuring costs, legacy postretirement costs, and substantial interest expense.
The board declared and paid a $190 million special distribution, equal to $3.56 per share on a recast basis. A first-quarter 2017 purchase-accounting measurement adjustment reduced mineral interests and additional paid-in capital by $3.5 million and did not affect earnings. The IPO was a secondary offering: selling stockholders received the net proceeds, and the company received none.
Outlook, risks, and contingencies
Management stated that cash, expected operating cash flow, and ABL availability should fund planned operating and capital needs for at least the next 12 months. Full-year 2017 capital spending was expected to be $97 million to $117 million, including sustaining, catch-up, and discretionary expenditures; this excludes any Blue Creek mine development. The company also reported an upgrade program for key production equipment. No specific annual revenue or earnings guidance was provided.
After quarter-end, the board adopted a policy for a quarterly dividend of $0.05 per share, with the initial payment scheduled for June 13, 2017. Future dividends or repurchases are discretionary and subject to business conditions, financial performance, investment needs, and ABL restrictions. The filing identifies met coal price and global steel demand, mining and geological risks, transportation and input costs, labor, permitting and environmental compliance, reclamation obligations, and liquidity and capital-market access as important risks.
Coal sales generally have short pricing terms, exposing results to market-price fluctuations. Natural gas swaps economically hedge some forecast sales and mature in Q4 2017; their fair-value liability was $0.9 million at quarter-end. The company reported $96.96 million in asset retirement obligations, $38.2 million in reclamation surety bonds, and $2.1 million in letters of credit for miscellaneous purposes. No environmental or miscellaneous litigation accruals were recorded; indemnification accruals were $0.3 million, with $0.2 million remaining maximum exposure. Management reported effective disclosure controls and remediation of previously identified material weaknesses in the first quarter of 2017.
Important facts for investors to verify
- Assess the sustainability of the exceptional realized coal price and margins, and the impact of shorter-term contract repricing.
- Reconcile the $190 million distribution with the sharp decline in cash, and evaluate liquidity after planned capital expenditures and dividends.
- Confirm the timing and expected returns of the $97 million to $117 million 2017 capital program and any potential Blue Creek development spending.
- Review ABL availability, borrowing-base conditions, covenant restrictions, and the ability to maintain dividends through a downturn.
- Distinguish company operating performance from the prior-year comparison, which uses a different accounting basis and reflects materially different mine operations.
- Monitor working-capital needs, reclamation and surety requirements, swap exposures, and the execution of internal-control remediation.