Warrior Met Coal, Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019; comparisons are with the corresponding 2018 periods. Warrior Met Coal produces and exports metallurgical coal from two Alabama underground mines, primarily to international steel producers.
Financial performance and position
- Q2 revenue: $397.6 million, up 23% year over year. Coal sales were $387.4 million; other revenue was $10.2 million.
- Q2 profitability: Operating income was $147.9 million (37.2% of revenue), compared with $101.1 million (31.3%) in Q2 2018. Net income was $125.5 million, or $2.43 per diluted share, versus $91.3 million, or $1.72 per diluted share.
- Q2 coal metrics: Sales volume rose to 2.032 million metric tons from 1.711 million. Average selling price increased to $190.66 per ton from $184.13; cash cost of sales declined to $100.64 per ton from $103.51. Gross price realization was 97% of the Platts Index, compared with 100%.
- First-half results: Revenue was $775.9 million, up 4%; operating income was $304.7 million, up 6%; net income was $235.9 million, down from $270.0 million. Diluted EPS was $4.57 versus $5.09. Coal volume increased to 3.933 million metric tons, while average selling price declined to $192.50 from $200.47.
- First-half cash flow: Operating cash flow was $357.8 million; investing cash outflow was $57.9 million; financing cash outflow was $386.2 million. Cash and cash equivalents ended the period at $119.3 million, down from $205.6 million at year-end 2018.
- Liquidity and debt: Reported available liquidity was $235.4 million, comprising $119.3 million cash and $116.1 million available under the ABL facility. There were no ABL borrowings. Debt, net of discount/premium, was $338.9 million, all long term, versus $469.0 million at December 31, 2018. The notes bear interest at 8% and mature in 2024.
- Balance sheet: Total assets were $1.290 billion and total liabilities were $577.8 million at June 30, 2019. Finance lease liabilities totaled $39.8 million.
Material changes versus prior comparable periods
- Q2 revenue growth reflected 321,000 additional tons sold and a $6.53-per-ton increase in average selling price. First-half revenue growth came from higher volume, partly offset by a $7.97-per-ton decline in average selling price.
- First-half cash cost of sales per ton improved to $98.26 from $101.12; however, higher sales volume increased total cost of sales.
- Interest expense declined following first-quarter retirement of $131.6 million principal amount of notes. The company recorded a $9.8 million loss on early debt extinguishment.
- First-half net income included $17.5 million of settlement proceeds from Walter Canada claims, recorded as other income, and $61.0 million of income tax expense. The comparable 2018 period had no tax expense, when NOLs offset taxable income and a valuation allowance applied.
- Cash used for dividends was $235.2 million in the first half. This included a $230.0 million special dividend, or $4.41 per share, paid in May 2019. First-half 2018 dividends were $355.4 million, including a larger special dividend.
Outlook, commentary, and risks
- Management expects full-year 2019 capital spending of $100–$120 million, including $70–$87 million sustaining and $30–$33 million discretionary capital expenditures, plus $18–$22 million of Mine No. 4 development costs. The filing reports $52.1 million of capital expenditures and $12.1 million of deferred mine development costs for the first half.
- Management expects discretionary projects’ benefits primarily in 2020 and beyond. It says operating cash flow, cash on hand, and ABL availability should fund debt service and planned operating and capital needs for at least the next 12 months, while noting that access to financing is not assured.
- Blue Creek remains under evaluation. Preliminary studies estimate initial development capital of $550–$600 million over five years and potential annual output of up to 2.7 million metric tons for a single longwall. Management expected the project to be fully permitted and “shovel ready” by early 2020; a development decision remained pending.
- The board authorized a new $70 million share repurchase program; no repurchases under it were reported in Q2. The board also declared a subsequent regular dividend of $0.05 per share in July 2019. Future special dividends and repurchases are discretionary and subject to debt-agreement restrictions.
- Key risks include volatile metallurgical coal prices and global steel demand, mine operating and geological conditions, weather, labor and input costs, transportation availability, environmental and reclamation obligations, customer credit, and access to capital. XCoal accounted for 17.5% of Q2 revenue and 21.7% of first-half revenue.
- The company reported no accruals for environmental matters other than mine reclamation asset-retirement obligations, and no amounts accrued for miscellaneous litigation. It reported $60.4 million of asset-retirement obligations and $39.8 million of reclamation surety bonds; it said it was in compliance with applicable ABL covenants.
Most important facts for investors to verify
- Whether coal prices, gross price realization, and sales volumes sustain the reported improvement in Q2 operating performance.
- How much of first-half earnings and cash generation is repeatable, given the $17.5 million claim settlement and the higher tax expense after the prior-year NOL treatment.
- Whether the planned capital spending and Mine No. 4 development remain within guidance, and whether the company proceeds with Blue Creek and secures financing for its estimated development cost.
- Cash available after dividends, debt repurchases, capital spending, and any future stock buybacks; confirm continued covenant compliance and ABL availability.
- Exposure to customer concentration, coal-market cyclicality, reclamation obligations, and contingent transportation minimums. The filing reported no liability for minimum-throughput obligations at June 30, 2019.