Warrior Met Coal, Inc. — Q1 2019 Form 10-Q
Business and period: U.S.-based producer and exporter of premium metallurgical coal, operating two underground mines in Alabama. This unaudited report covers the three months ended March 31, 2019, compared with the three months ended March 31, 2018.
Key financial results
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Total revenue | $378.3 million | $421.8 million |
| Operating income / margin | $156.8 million / 41.4% | $187.3 million / 44.4% |
| Net income / diluted EPS | $110.4 million / $2.14 | $178.7 million / $3.36 |
| Operating cash flow | $126.4 million | $193.7 million |
| Capital expenditures | $24.4 million | $22.5 million |
| Cash and cash equivalents at period end | $154.9 million | $205.6 million at Dec. 31, 2018 |
| Total debt at period end | $338.7 million | $469.0 million at Dec. 31, 2018 |
Coal sales were $369.7 million; other revenue was $8.6 million. Coal sold totaled 1.901 million metric tons, versus 1.920 million. Average selling price fell to $194.47 per metric ton from $215.04, while cash cost of sales per ton declined to $95.71 from $98.98. Segment Adjusted EBITDA was $187.1 million, down from $222.2 million; Adjusted EBITDA was $181.0 million, down from $216.4 million. These EBITDA measures are non-GAAP.
Net cash used in investing was $29.7 million, and financing used $147.3 million, primarily reflecting $140.3 million of debt retirement. Cash and restricted cash decreased $50.7 million during the quarter. At March 31, liquidity was reported as $275.3 million: $154.9 million of cash and $120.4 million available under the ABL Facility, net of letters of credit. No ABL borrowings were outstanding.
Changes and notable items
- Revenue decreased $43.5 million year over year, principally because the average coal selling price declined; sales volume also decreased by 19,000 metric tons. Gross price realization was 98%, compared with 99%.
- Operating margin declined 3.0 percentage points. Net income also reflected $28.0 million of income tax expense, versus none in Q1 2018, and a $9.8 million loss on early extinguishment of debt. The prior-year period included $3.3 million of transaction expenses.
- The company repurchased $131.6 million principal amount of its 8% senior secured notes due 2024 in March, paying premiums and fees that contributed to the extinguishment loss. Remaining debt was $343.4 million principal, with a carrying value of $338.7 million, due in 2024.
- Coal royalty expense increased to $26.7 million from $22.3 million. Property, plant and equipment obligation of $32.7 million was recorded among other long-term liabilities.
Outlook, capital allocation and risks
- Management expected 2019 capital spending of $100 million to $120 million, including $70 million to $87 million of sustaining and $30 million to $33 million of discretionary capital expenditures, plus $18 million to $22 million of Mine No. 4 development costs. The filing says discretionary project benefits are expected primarily in 2020 and beyond; spending could be reduced if conditions deteriorate.
- Blue Creek remained under evaluation. Preliminary estimates cited $550 million to $600 million of initial development capital over five years and potential annual production of up to 2.7 million metric tons from a single longwall. Management expected the project to be permitted and “shovel ready” by early 2020, with a development decision to follow; these are preliminary plans and estimates.
- After quarter-end, the board declared a $230 million special dividend, intended to be funded with cash on hand, and a regular $0.05-per-share quarterly dividend. The company also authorized a new $70 million share repurchase program. The board retains discretion over dividends and repurchases.
- Management stated that cash, operating cash flow and ABL availability were expected to fund debt service and planned operating and capital needs for at least 12 months. This outlook depends on cash generation and continued access to liquidity.
- Principal disclosed risks include global steel and met coal demand and prices, mining/geologic and operating conditions, transport availability and costs, workforce and input costs, debt and covenant compliance, liquidity and capital access, reclamation obligations, permits and environmental regulation, and the ability to sustain dividends or repurchases. The filing reported no material change to the risk factors in the 2018 Form 10-K.
Important facts for investors to verify
- Whether met coal prices and realized selling prices recover or continue to pressure revenue and margins.
- Whether cash generation and liquidity remain sufficient after the $230 million special dividend, planned capital expenditures and debt service.
- Execution, cost and timing of the 2019 capital program and Mine No. 4 development; verify updated plans for Blue Creek before treating preliminary estimates as committed.
- Debt repayment terms, remaining note balance and compliance with ABL and indenture restrictions governing distributions and repurchases.
- Customer and shipment concentration: XCoal represented approximately 25.8% of Q1 2019 revenue.