Warrior Met Coal, Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019; comparisons are with the corresponding 2018 periods. The company produces and exports metallurgical coal from two underground Alabama mines, primarily to steel producers in Europe, South America and Asia. Unless otherwise noted, financial amounts below are in U.S. dollars.
Financial performance
| Metric | Q3 2019 | Q3 2018 | First nine months 2019 | First nine months 2018 |
|---|---|---|---|---|
| Total revenue | $287.5 million | $273.3 million | $1,063.4 million | $1,017.6 million |
| Operating income | $54.6 million | $62.7 million | $359.3 million | $351.1 million |
| Net income | $45.0 million | $52.6 million | $280.9 million | $322.6 million |
| Diluted earnings per share | $0.87 | $1.00 | $5.44 | $6.09 |
| Segment Adjusted EBITDA | $90.6 million | $97.7 million | $459.9 million | $456.4 million |
| Adjusted EBITDA | $82.7 million | $94.1 million | $439.6 million | $439.4 million |
- Q3 operating margin was 19.0%, versus 22.9% a year earlier; net margin was 15.7%, versus 19.2%. For the nine-month periods, operating margin was 33.8% versus 34.5%, and net margin was 26.4% versus 31.7%.
- Coal sales volume was 1.805 million metric tons in Q3 and 5.738 million for the first nine months, up from 1.513 million and 5.143 million, respectively. Production was 1.963 million and 6.039 million metric tons, respectively.
- Average selling price per metric ton fell to $155.59 in Q3 from $175.09, and to $180.89 for the first nine months from $193.05. Gross price realization was 102% and 99%, respectively, versus 97% and 98% in the comparable periods.
- Cash cost of sales per metric ton declined to $104.97 in Q3 from $109.99, and to $100.37 for the first nine months from $103.78.
- Nine-month operating cash flow was $508.3 million, versus $428.6 million. Investing cash outflow was $100.3 million, including $78.4 million of property, plant and equipment purchases and $18.4 million of deferred mine development costs. Financing cash outflow was $404.9 million. Cash and restricted cash increased $3.1 million.
- At September 30, cash and cash equivalents were $208.7 million; short-term investments were $24.2 million, of which approximately $14.3 million was pledged as collateral. The company reported available liquidity of $334.6 million, including $116.1 million available under its ABL Facility. There were no ABL borrowings outstanding.
- Long-term debt was $339.0 million, consisting principally of 8% senior secured notes due 2024. Total liabilities were $603.6 million. Finance lease liabilities totaled $37.0 million.
Material changes and capital returns
- Q3 coal sales revenue rose $15.9 million year over year: higher sales volume added approximately $51.1 million, partly offset by approximately $35.3 million from lower average selling prices. Higher volume also increased cost of sales; lower unit cash costs partially offset that increase.
- For the first nine months, revenue increased $45.8 million, as higher volume more than offset lower selling prices. Operating income increased $8.3 million, but net income declined $41.6 million, primarily reflecting $68.6 million of income tax expense and a $9.8 million debt-extinguishment loss, partly offset by $22.8 million of other income and lower interest expense.
- Interest expense declined year over year following the first-quarter retirement of $131.6 million principal amount of notes. The company recorded a $9.8 million loss on early extinguishment in connection with the repurchases.
- The company paid a $230 million special dividend in May 2019, alongside regular quarterly dividends of $0.05 per share. Nine-month dividends paid totaled $237.8 million. It repurchased 500,000 shares for approximately $10.6 million under its $70 million repurchase program, with approximately $58.8 million remaining authorized at September 30.
Outlook, commentary and risks
- Management stated that cash from operations, cash on hand and ABL availability should provide adequate resources for debt service, operations and planned capital expenditures for at least the next 12 months. This is management’s assessment, not a guarantee.
- 2019 capital spending was expected to total $100–$120 million, including approximately $70–$87 million of sustaining and $30–$33 million of discretionary expenditures. Mine No. 4 development costs were expected to be approximately $18–$22 million. The filing reports $78.4 million of capital expenditures and $18.4 million of deferred mine development costs through September 30.
- Blue Creek remained under evaluation. Preliminary studies contemplated a single longwall producing up to 2.7 million metric tons annually, with estimated initial capital of $550–$600 million over five years. Management expected permitting and project-readiness work to progress toward early 2020; a development decision remained pending. These estimates are preliminary and exclude any material Blue Creek spending from the stated 2019 capital plan.
- Key risks include global steel and metallurgical coal demand and pricing, mining and geological conditions, weather, labor and equipment availability, transport costs, regulatory and environmental requirements, reclamation obligations, customer and credit concentration, access to capital, and compliance with debt covenants. Coal sales are exposed to market-price fluctuations; the company had no natural-gas swaps outstanding at quarter-end.
- Q3 other income included $5.3 million of settlement proceeds from Walter Canada claims. The first-nine-month total was $22.8 million; further recoveries, if any, depend on the ongoing proceedings and are uncertain. Income tax expense was described as noncash while the company continued using net operating loss carryforwards.
- The company reported compliance with applicable ABL covenants and was not subject to the facility’s springing fixed-charge coverage test at quarter-end. Management reported no material changes to previously disclosed risk factors, no environmental or miscellaneous litigation accruals, and effective disclosure controls.
Important facts for investors to verify
- Whether subsequent coal prices, shipment volumes and customer demand support the quarter’s production and sales trends, particularly given the lower realized selling price.
- Actual 2019 capital spending and Mine No. 4 development costs versus the stated ranges, and whether discretionary projects deliver the expected operating benefits.
- Blue Creek’s final permitting status, financing, project economics and any board decision to proceed with the estimated multiyear investment.
- Cash-tax consequences as net operating loss carryforwards are used, and the distinction between reported tax expense and cash taxes.
- Future debt reduction, dividends and repurchases in light of the remaining authorization, liquidity needs and restrictions under the ABL Facility and notes indenture.
- Any additional Walter Canada claim recoveries, and the continued availability of ABL capacity and surety support for reclamation obligations.