Business context and reporting period
Warrior Met Coal, Inc. filed this Form 10-K for the fiscal year ended December 31, 2018; it is an annual report, not a standalone fourth-quarter filing. The company operates two underground metallurgical-coal mines in Alabama and exports primarily to steelmakers. Results are reported in one segment. The 2018 comparison with 2017 is on a consistent Successor basis.
Financial performance and position
| Metric | 2018 | 2017 |
|---|---|---|
| Total revenue | $1.378 billion | $1.169 billion |
| Operating income | $508.3 million; 36.9% margin | $423.4 million; 36.2% margin |
| Net income | $696.8 million; $13.19 per diluted share | $455.0 million; $8.62 per diluted share |
| Adjusted EBITDA (non-GAAP) | $601.0 million | $517.7 million |
| Operating cash flow | $559.4 million | $434.5 million |
| Cash capital expenditures | $101.6 million | $92.6 million |
| Cash and cash equivalents at year-end | $205.6 million | $35.5 million |
| Working capital | $345.5 million | $163.6 million |
| Long-term debt, carrying value | $468.2 million | $342.9 million |
Coal sales were $1.343 billion, or 97.4% of total revenue. The company sold 6.931 million metric tons and produced 7.017 million metric tons. Average net selling price was $193.72 per metric ton, and cash cost of sales was $103.35 per ton. Total cash cost of sales was $716.3 million. The reported gross profit was approximately $651.2 million, or 47.3% of revenue.
Year-end available liquidity was approximately $326.0 million: $205.6 million cash and $120.4 million available under the ABL facility. No ABL loans were outstanding; $4.6 million of letters of credit reduced availability. The company reported total liabilities of $682.4 million and stockholders’ equity of $712.6 million.
Changes versus 2017
- Revenue rose $208.9 million, principally because coal sales volume increased by about 1.0 million metric tons; average net selling price also increased by $3.78 per ton.
- Operating income increased $84.9 million and Adjusted EBITDA increased $83.3 million. Cash cost of sales per ton rose from $99.86 to $103.35, tempering the benefit of higher volumes and prices.
- Operating cash flow increased $124.9 million. Investing cash outflow increased to $107.6 million, including $101.6 million for property, plant and equipment and $8.9 million for mine development.
- Debt increased following issuance of $125 million of additional 8% senior secured notes in March 2018. The company used the proceeds and approximately $225 million of cash to fund a $350 million special dividend in April.
- Net income included a $225.8 million income-tax benefit from releasing the deferred-tax valuation allowance and a $24.6 million gain from revisions to asset-retirement estimates. These nonrecurring items materially boosted reported earnings.
Outlook, risks and unusual items
Management expects 2019 capital spending of $100 million to $120 million, including $70 million to $87 million of sustaining capital and $30 million to $33 million of discretionary projects. It expects benefits from much of the discretionary investment mainly in 2020 and later. No revenue, coal-price or production guidance is provided in the supplied filing text. Management expects a 23%–25% effective income-tax rate beginning in 2019, while anticipating no federal cash income taxes for several years because of tax attributes; it also expects approximately $42.9 million of AMT-credit refunds during 2019–2022.
The company says cash, operating cash flow and ABL availability should fund debt service, operations and planned capital spending for at least the next twelve months. Its principal exposures include volatile met-coal prices and steel demand, concentration in two Alabama mines and a small number of customers, operating and geological hazards, transportation and port dependence, labor negotiations, permitting and environmental obligations, and restrictions under secured debt agreements. The UMWA agreement expires March 31, 2021. Reclamation and black-lung estimates depend on assumptions that may change.
The 8% senior secured notes have $475 million principal outstanding and mature in 2024. The ABL facility was amended in October 2018, with $125 million of commitments and maturity extended to October 2023. In February 2019, after year-end, the company announced an offer to repurchase up to $150 million principal amount of notes at 103% and a concurrent tender offer for up to $150 million at 104.25%; these offers are subsequent events, not completed transactions reported at year-end. The company also reported ordinary-course legal matters with no material accrual, and management said it was in substantial compliance with environmental requirements.
Most important facts for investors to verify
- How much of 2018 net income and EPS depended on the $225.8 million tax benefit and the asset-retirement estimate gain, and what earnings look like excluding these items.
- Whether coal prices, shipment volumes and production can support margins as cash cost per ton rises; verify customer concentration, with the five largest customers accounting for about 54.1% of 2018 sales revenue.
- 2019 capital spending, project timing and whether the expected operational benefits emerge from 2020 onward.
- Debt-service capacity and covenant headroom after the 2018 note issuance, prior special dividends and any subsequent note repurchases or shareholder distributions.
- Progress and funding needs for Blue Creek development, and the assumptions underlying the reported recoverable reserves.
- Potential changes in reclamation, black-lung, surety-bond, environmental and mine-safety costs, as well as renewal of the labor agreement before its 2021 expiry.