SunCoke Energy, Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021; filed July 29, 2021. SunCoke produces coke for steelmakers and operates coal and aggregate handling terminals. Its coke business is supported primarily by long-term take-or-pay contracts; logistics and newer foundry and export coke sales provide additional activity.
Financial performance
| Metric | Q2 2021 | Q2 2020 | First half 2021 | First half 2020 |
|---|---|---|---|---|
| Revenue | $364.3 million | $338.0 million | $724.2 million | $720.7 million |
| Operating income | $33.9 million | $24.9 million | $72.1 million | $52.9 million |
| Operating margin | 9.3% | 7.4% | 10.0% | 7.3% |
| Net income (loss) attributable to SunCoke | $(8.8) million | $6.5 million | $7.7 million | $11.4 million |
| Adjusted EBITDA | $68.0 million | $59.0 million | $138.6 million | $121.1 million |
| Operating cash flow | $39.8 million | $21.8 million | $104.6 million | $48.6 million |
Q2 diluted EPS was $(0.11), versus $0.08 a year earlier; first-half diluted EPS was $0.09, versus $0.14. Q2’s net loss reflected a $31.9 million loss on extinguishment of debt. First-half capital expenditures were $33.7 million, down from $36.9 million. First-half cash dividends paid were $10.1 million.
Business and period-over-period changes
- Q2 revenue increased $26.3 million year over year, while first-half revenue was up $3.5 million. Higher coke and logistics volumes were partly offset by lower coal-price pass-through revenue.
- Logistics was the main source of EBITDA growth: Q2 segment Adjusted EBITDA was $11.4 million versus $3.0 million; first-half results were $22.3 million versus $6.3 million. Higher export-coal demand increased terminal volumes. First-half tons handled rose to 10.4 million from 7.1 million.
- Domestic Coke Q2 Adjusted EBITDA was nearly unchanged at $61.4 million versus $61.6 million. First-half production was 2.09 million tons, and capacity utilization was reported at 101% versus 98%. Lower coal prices reduced revenue and EBITDA, partly offset by higher volumes and energy results.
- Brazil Coke first-half Adjusted EBITDA increased to $8.5 million from $7.3 million, reflecting higher volumes and production bonuses.
- Management reported U.S. steel utilization strengthening from 75% in January to 83% in June and said SunCoke’s facilities were operating at full capacity in 2021.
Debt, liquidity and outlook
- At June 30, cash was $51.7 million, total debt and financing obligations were $653.3 million including the current portion, and revolver borrowings were $153.0 million. The $350 million revolving facility had $184.9 million available after letters of credit.
- In June, SunCoke issued $500 million of 4.875% secured notes due 2029, replacing all $587.3 million of 7.5% notes due 2025. The redemption, including premium and accrued interest, was funded with the new notes and revolver borrowings; the notes were fully satisfied and discharged in June and redeemed July 8. The refinancing generated the reported $31.9 million extinguishment loss. The revolver maturity was extended to June 2026 and capacity reduced by $50 million.
- Management raised 2021 Adjusted EBITDA guidance from $215–$230 million to $255–$265 million, citing stronger coal exports and expected demand for export and foundry coke. The filing also expects approximately $90 million of 2021 capital expenditures and approximately 10 million tons of domestic logistics throughput.
- Management said available resources were sufficient for working capital needs for at least the next 12 months and the foreseeable future. The company was in compliance with debt covenants at quarter-end. It declared a $0.06-per-share dividend payable September 1, 2021, subject to the stated record date.
Risks, contingencies and notable items
- Customer concentration is significant: Cliffs Steel accounted for $253.0 million of Q2 revenue and $508.7 million of first-half revenue. Steel-sector cyclicality, customer financial condition, and contract performance could affect results.
- The Department of Labor’s proposed collateral requirement for legacy black-lung self-insurance was $40.4 million, compared with $8.4 million currently posted. SunCoke appealed; an unsuccessful appeal could reduce liquidity.
- The company cited ongoing exposure to COVID-19 impacts, coal and steel market changes, operating reliability at aging facilities, environmental compliance, labor and safety matters, and debt covenants. Management said pending claims were not expected to have a material adverse financial impact, though some could be resolved unfavorably.
- Prior EPA and state environmental matters at Haverhill, Granite City and Indiana Harbor were addressed through consent decrees and related projects. Management reported no material changes to risk factors or market-risk exposure from the 2020 Form 10-K.
Important facts for investors to verify
- Whether the stronger export-coal and steel-demand outlook supports the revised $255–$265 million Adjusted EBITDA guidance, a non-GAAP measure.
- Progress and financial effects of foundry and export coke sales, including whether these sales deliver sustainable margins beyond pass-through contract economics.
- Resolution of the black-lung collateral appeal and any resulting liquidity or collateral requirements.
- Debt balances, refinancing-related interest savings, revolver availability, covenant headroom and the timing of the large 2026-and-later maturities.
- Customer concentration and the assumptions underlying expected logistics throughput and capital spending.