Business context and reporting period
SunCoke Energy, Inc. filed this unaudited Form 10-Q for the three months ended March 31, 2012. The company operates U.S. metallurgical coke facilities and coal mines, and operates a cokemaking facility in Brazil. It became independent of Sunoco on January 17, 2012. The prior-year comparison includes historical combined results and is not fully comparable with the 2012 results of the independent public company.
Financial performance and liquidity
| Metric | Q1 2012 | Q1 2011 / prior date |
|---|---|---|
| Total revenue | $481.3 million | $333.4 million; up 44.4% |
| Operating income | $33.9 million | $4.3 million |
| Net income | $16.6 million | $5.7 million |
| Net income attributable to SunCoke / net parent investment | $16.9 million; $0.24 per diluted share | $11.9 million; $0.17 per diluted share |
| Adjusted EBITDA | $55.8 million | $26.6 million |
| Operating margin | Approximately 7.0% | Approximately 1.3% |
| Operating cash flow | $(3.1) million | $7.4 million |
| Capital expenditures | $9.5 million | $59.5 million |
| Cash and cash equivalents | $113.6 million | $127.5 million at December 31, 2011 |
| Total debt | $725.7 million | $726.4 million at December 31, 2011 |
Net cash declined $13.9 million during the quarter. Free cash flow, as defined by the company, was negative $12.6 million. Current assets were $393.3 million and current liabilities were $234.9 million at March 31, 2012. The company reported $149.1 million of available capacity under its $150 million revolving facility, subject to the credit agreement. Debt comprises variable-rate term loans and $400 million of 7.625% senior notes due 2019. Interest expense was $12.1 million; the company also had a $125 million interest-rate swap position.
Material changes versus the prior comparable period
- Revenue growth primarily reflected Middletown’s contribution, higher coal-cost pass-throughs and increased domestic coke volumes. Middletown produced 142,000 tons and contributed $68.5 million of revenue and $11.5 million of Adjusted EBITDA.
- Adjusted EBITDA increased $29.2 million, driven by Middletown’s ramp-up, improved Indiana Harbor operations and better yields and cost recovery at other domestic coke facilities. Coal Mining Adjusted EBITDA fell to $7.4 million from $12.3 million as production costs rose.
- Operating cash flow turned negative, principally due to working-capital timing, including lower payables, and interest payments. Cash interest paid was $19.0 million.
- Financing results shifted from $4.5 million of net financing income in Q1 2011 to $12.0 million of net financing expense in Q1 2012, reflecting the company’s post-IPO debt and the loss of affiliate interest income.
- Q1 2011 included an $18.5 million loss on firm coke purchase commitments; there was no corresponding charge in Q1 2012. Q1 2012 included a $1.5 million write-down of Indiana Harbor pad coal and a $2.8 million coke-inventory reduction charge.
Guidance, management commentary, risks and unusual items
- Management maintained 2012 diluted EPS guidance of $1.30–$1.65 and Adjusted EBITDA guidance of $250–$280 million. It expected domestic coke production above 4.3 million tons, coal production of approximately 1.6 million tons, and free cash flow above $75 million. These are forward-looking estimates, not guarantees.
- Management raised expected 2012 free cash flow from above $50 million, citing deferred coal-expansion spending and timing of international investment opportunities. It expected approximately $100 million of 2012 capital expenditures, including about $25 million for Indiana Harbor refurbishment.
- Softening metallurgical-coal markets led the company to defer most Jewell coal expansion spending, idle certain higher-cost mines and consolidate mining resources. It reduced expected 2012 coal production to 1.6 million tons from the prior 1.8 million-ton expectation.
- The company expected approximately $80–$100 million of environmental projects at Haverhill and Granite City over 2012–2016. EPA discussions concerning alleged permit violations at these facilities remained ongoing; potential penalties and final project costs were not determined. Separate Indiana Harbor EPA allegations also remained unresolved.
- Indiana Harbor’s initial customer contract term ends September 30, 2013. The company planned approximately $50 million of refurbishment work through 2014 and said a new long-term customer agreement was not assured.
- The tax-sharing agreement eliminated $64.6 million of tax benefits from the balance sheet in Q1 2012, as part of $208.0 million eliminated after separation; the quarter’s reduction was recorded through equity rather than current-period earnings. The company reported approximately $0.5 million of potentially unrealizable tax benefits still under review.
- SunCoke repurchased 99,637 shares for approximately $1.4 million under a three-year authorization for up to 3.5 million shares. Management said disclosure controls were effective and reported no material change in internal control over financial reporting.
Most important facts for investors to verify
- Whether domestic coke operating gains and Middletown’s contribution can be sustained, including the effect of start-up costs and the 2013 cost-recovery mechanism.
- Progress on renewing the Indiana Harbor coke contract, planned refurbishment spending, and the outcome and cost of environmental matters at Indiana Harbor, Haverhill and Granite City.
- Coal-market conditions, mining cash costs, production plans and the timing and cost of the Revelation contract-mining and rail-loading projects.
- Cash conversion and working-capital trends, available revolver capacity, variable-rate debt exposure and compliance with debt covenants.
- Assumptions supporting 2012 EPS, Adjusted EBITDA and free-cash-flow guidance; Adjusted EBITDA and free cash flow are non-GAAP measures and may not be comparable with similarly named measures at other companies.
- Effects of the Sunoco separation and tax-sharing arrangements, including remaining tax-attribute adjustments and the comparability of historical results.