Warrior Met Coal, Inc. — Q2 2017 Form 10-Q
Business context and reporting period. The company produces and exports metallurgical coal from two underground mines in Alabama, selling primarily to steelmakers. This unaudited report covers the quarter and six months ended June 30, 2017. The company became a corporation in April 2017 and completed an IPO in which existing stockholders sold shares; Warrior received no IPO proceeds. Comparisons require care because predecessor and successor periods reflect different accounting bases, and Mine No. 4 was not operating in the Q2 2016 comparison period.
Financial performance and position
| Metric | Q2 2017 | Six months 2017 |
|---|---|---|
| Revenue | $363.4 million | $617.3 million |
| Operating income | $163.3 million; 44.9% margin | $274.1 million; 44.4% margin |
| Net income | $129.9 million; 35.7% margin; $2.46 per diluted share | $238.2 million; 38.6% margin; $4.52 per diluted share |
| Operating cash flow | $161.4 million | $227.0 million |
| Capital expenditures | $16.9 million | $28.3 million |
- Q2 coal sales were $351.8 million on 1.762 million metric tons sold. Average realized price was $199.65 per ton and cash cost of sales was $90.62 per ton.
- Compared with Q2 2016, Q2 2017 revenue rose from $91.5 million to $363.4 million, and net results improved from a $50.1 million loss to $129.9 million income. Coal price and volume increases were key drivers; both mines operated in Q2 2017, versus only Mine No. 7 in Q2 2016. The 2016 comparison also included a $25 million VEBA contribution and $5.3 million of Mine No. 4 idle costs.
- At June 30, cash and equivalents were $155.8 million; short-term investments were $17.5 million. The company reported $255.8 million of available liquidity, including $100 million available on its undrawn ABL revolver. Debt was $5.2 million, including $2.9 million current. Current assets were $362.5 million and current liabilities $83.1 million.
- Six-month operating cash flow included a $45.3 million working-capital increase, principally associated with higher receivables and inventory. Financing cash outflow was $194.2 million, largely reflecting the $190 million special distribution and $2.7 million quarterly dividend.
Changes, outlook and risks
- Management reported a Q2 benchmark index price of about $194 per metric ton, down about 32% from the Q1 2017 benchmark of $285, following Australian cyclone-related supply disruption and a change to average-index pricing. Management expected quarterly pricing to use a one-month-lag average of Platts premium low-vol and TSI premium coking coal indices, while noting the method could change.
- Management estimated 2017 capital spending of $97 million to $117 million, including sustaining, catch-up and discretionary projects, with most spending expected in the second half. The plan excludes possible development spending at the undeveloped Blue Creek mine.
- Management said cash, expected operating cash flow and revolver availability should fund planned operating and capital needs for at least the next 12 months. This depends on operating performance and continued access to financing.
- The board adopted a $0.05-per-share quarterly dividend policy; the first payment was made in June, and another $0.05 dividend was declared after quarter-end. Future dividends and any special dividend or repurchase remain discretionary and subject to business conditions and capital needs.
- Met coal prices and global steel demand are key exposures; sales contracts generally have quarterly pricing and up to one-year volume terms. Other risks include mine operating, geological, weather, labor, transport, regulatory, environmental and reclamation risks, as well as ABL covenant and liquidity risks.
- The company maintained a valuation allowance against significant deferred tax assets and said use of tax-loss carryforwards is limited by IRC Section 382. It had requested an IRS private letter ruling that, if favorable, could remove the annual limitation; no favorable outcome was assured. Management expected the effective tax rate for the remainder of 2017 to be closer to the statutory rate, subject to conditions.
- Asset retirement obligations were $97.7 million. The filing reported no environmental or miscellaneous-litigation accruals, but disclosed $0.3 million accrued for an indemnity (with $0.2 million remaining maximum exposure) and surety bonds of $37.9 million for reclamation. No liability was recorded for minimum transportation-throughput requirements at quarter-end.
Most important facts for investors to verify
- Whether met coal prices and quarterly contract pricing remain strong enough to support realized prices, margins and cash generation.
- Whether planned second-half capital spending stays within the $97–$117 million estimate and delivers the intended equipment and reliability improvements.
- Whether working-capital requirements, reclamation obligations and other commitments affect liquidity despite the reported cash and undrawn revolver.
- The status and tax impact of the IRS private letter ruling request, Section 382 limits and deferred-tax valuation allowance.
- Whether the board continues the quarterly dividend while balancing capital needs and volatile coal-market conditions.