SunCoke Energy, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. SunCoke produces coke at five U.S. facilities and operates a Brazil facility under contract; it also runs coal and aggregate logistics terminals. Most domestic coke sales are under long-term take-or-pay agreements.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $516.8 million | $366.5 million | $1,458.5 million | $1,090.7 million |
| Operating income | $47.6 million | $41.4 million | $130.7 million | $113.5 million |
| Net income | $42.5 million | $24.1 million | $92.1 million | $34.8 million |
| Net income attributable to SunCoke | $41.4 million | $23.0 million | $88.9 million | $30.7 million |
| Adjusted EBITDA | $83.7 million | $73.9 million | $238.8 million | $212.5 million |
| Operating cash flow | $54.4 million | $79.4 million | $120.6 million | $184.0 million |
Revenue rose largely because higher coal costs were passed through in Domestic Coke contracts; export coke pricing also helped. Adjusted EBITDA improved, led by Domestic Coke and Logistics. Q3 operating income increased less than revenue as product costs rose. Q3 net income benefited from tax items, including an $11.3 million release of a valuation allowance and $4.6 million of research and development tax benefits. The nine-month 2021 comparison included a $31.9 million debt-extinguishment loss; 2022 did not.
Cash, debt, and liquidity
- Cash was $59.3 million at September 30, 2022, versus $63.8 million at year-end 2021. Total assets were $1,679.8 million and total liabilities were $1,068.2 million.
- Total borrowings before debt issuance costs were $576.6 million, including $500.0 million of 2029 senior notes, $67.0 million drawn on the revolving facility, and a $9.6 million financing obligation. The revolver had $283.0 million available; $23.4 million of letters of credit did not reduce that availability.
- Nine-month operating cash flow fell $63.4 million year over year, mainly from working-capital needs related to higher coal prices and higher income-tax payments. Capital expenditures were $55.7 million; dividends paid were $16.9 million. Cash declined $4.5 million over the period.
- Management said available resources were sufficient for working-capital needs for at least the next 12 months and foreseeable future. The company reported compliance with debt covenants. The revolver requires a maximum net leverage ratio of 4.50:1.00 and minimum interest coverage of 2.50:1.00.
Operating developments and outlook
- Domestic Coke revenue rose to $487.7 million in Q3, while segment Adjusted EBITDA increased to $76.6 million. Higher pass-through coal prices and export coke pricing supported results; production and sales volumes were lower year over year, and planned maintenance raised costs. Domestic capacity utilization was 101%.
- Logistics Adjusted EBITDA increased to $12.9 million in Q3, supported by higher terminal volumes and favorable pricing; tons handled rose to 5.7 million from 4.9 million.
- Brazil Coke Q3 Adjusted EBITDA declined to $3.3 million from $4.5 million, primarily because production bonuses were absent. Its operating agreement runs through at least 2023.
- Management noted that export coke prices and demand weakened in Q3 versus the first half amid economic uncertainty, inflation, and commodity-price volatility. Higher European coal demand was expected to continue benefiting CMT export volumes and handling rates.
- On June 28, 2022, SunCoke signed a non-binding letter of intent with U.S. Steel concerning a proposed acquisition of two blast furnaces and construction of a 2-million-ton-per-year granulated pig iron facility, with a proposed 10-year initial sales term. The filing does not present this as a completed or binding transaction.
- The Board declared a $0.08-per-share dividend payable December 1, 2022. No formal earnings or full-year financial guidance is provided in the filing.
Risks, contingencies, and unusual items
- The estimated black lung liability was $65.7 million. The Department of Labor’s proposed collateral requirement for self-insured legacy claims was $40.4 million, versus $8.4 million then provided. The company appealed; an unsuccessful appeal could require additional collateral and reduce liquidity.
- Pending and threatened legal matters include commercial, employment, personal injury, tort, and environmental claims. Management judged any potential liability unlikely to be material, but outcomes are uncertain.
- Key disclosed risks include steel and coal market cyclicality, inflation and commodity-price volatility, customer or supplier distress, aging facilities and maintenance needs, environmental and regulatory obligations, and dependence on coke demand and long-term contracts.
- Credit ratings were BB- with stable outlook from S&P and B1 with positive outlook from Moody’s. The company reported no material change in market-risk exposure from its prior annual report.
Investor verification priorities
- Track whether favorable export coke pricing persists and how coal-cost pass-through affects margins, working capital, and cash conversion.
- Verify the outcome and timing of the black lung collateral appeal and any resulting liquidity impact.
- Monitor the U.S. Steel granulated pig iron proposal for binding agreements, financing, capital requirements, and execution risks.
- Review revolver availability, covenant headroom, debt levels, and the sustainability of dividends and capital spending.
- Assess whether take-or-pay customer contracts, terminal volumes, and facility reliability remain adequate amid steel-market and commodity volatility.