Suncoke Energy, Inc. quarterly report, Q1 FY2020

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Suncoke Energy, Inc. — Q1 2020 Form 10-Q

Reporting period: Three months ended March 31, 2020; filed May 8, 2020. SunCoke produces coke for steelmaking, operates a Brazil cokemaking facility, and provides coal and aggregate logistics services.

Financial results and liquidity

  • Revenue: $382.7 million, down 2.2% from $391.3 million. Lower logistics revenue and lower coal-price pass-throughs were partly offset by higher domestic coke volumes.
  • Profitability: Operating income was $28.0 million versus $30.0 million; operating margin was approximately 7.3% versus 7.7%. Net income was $5.9 million versus $12.2 million; net income attributable to SunCoke was $4.9 million versus $9.8 million. Diluted EPS was $0.06 versus $0.15.
  • Adjusted EBITDA: $62.1 million versus $67.3 million; margin was approximately 16.2% versus 17.2%. Domestic Coke EBITDA increased to $63.4 million from $58.5 million, while Logistics EBITDA fell to $3.3 million from $12.7 million.
  • Cash flow: Operating cash flow was $26.8 million versus $35.3 million; capital expenditures were $22.8 million versus $20.9 million. Financing activities provided $134.7 million, chiefly reflecting increased revolver borrowing. Cash rose to $235.8 million from $97.1 million.
  • Debt and liquidity: Debt and financing obligations totaled $927.8 million carrying value, including $300.0 million drawn on the $400.0 million revolver. Revolver availability was $88.2 million after letters of credit. Cash less carrying-value debt was approximately $692.0 million. The company reported compliance with debt covenants.
  • Tax and other: Income tax expense was $10.4 million, a 63.8% effective rate, primarily reflecting $6.5 million of deferred tax expense from revalued deferred tax assets. The company recorded a $2.9 million gain from repurchasing $12.0 million face value of 2025 notes for $8.9 million.

Material changes versus Q1 2019

  • Domestic Coke production rose to 1.069 million tons from 1.006 million; utilization increased to 101% from 96%, supported by rebuilt Indiana Harbor ovens.
  • Logistics tons handled declined to 4.214 million from 5.784 million. The segment was affected by weaker export demand, lower CMT rates, and Foresight Energy’s March 2020 bankruptcy and contract rejection.
  • Net income declined despite slightly higher pretax income, primarily because tax expense increased substantially. The comparison also reflects that public Partnership unitholders were bought out in June 2019; Q1 2019 included their share of income.

Outlook, risks, and unusual items

  • Management said Q1 results were minimally affected by COVID-19, but steelmaking demand weakened sharply as customers idled or reduced blast-furnace production. The company withdrew its previously issued 2020 outlook and said it would provide an update after customer discussions.
  • In May 2020, AM USA asserted force majeure under the Haverhill and Jewell coke agreements, citing COVID-related steel-industry disruption. SunCoke disputes the claim; if upheld, the impact could be material. The company said it would seek a commercial resolution.
  • The company increased revolver borrowings by $156.7 million during Q1 to preserve financial flexibility. It temporarily suspended further share repurchases; Q1 repurchases totaled $7.0 million, and a $0.06-per-share dividend was declared for payment in June.
  • The Department of Labor required proposed collateral of $40.4 million for certain legacy black-lung obligations, compared with $8.4 million then provided. SunCoke appealed; an unsuccessful appeal could reduce liquidity.
  • Moody’s reaffirmed its B1 rating in April but changed the outlook to negative; S&P reaffirmed BB- with a stable outlook. Environmental matters and other claims remain, though management did not expect them to have a material adverse effect.

Most important facts for investors to verify

  • Outcome and financial effect of AM USA’s force-majeure claim and customer-relief negotiations, including any revised 2020 outlook.
  • Steel production, coke volumes, and customer acceptance under the long-term coke agreements, especially given customer concentration.
  • Logistics recovery prospects after Foresight’s bankruptcy, the Javelin contract’s lower rates, and CMT’s efforts to diversify.
  • Liquidity after revolver borrowing, any collateral required for black-lung obligations, and compliance with debt covenants.
  • Basis and sustainability of earnings, including the unusually high Q1 tax rate and reliance on non-GAAP Adjusted EBITDA.