SunCoke Energy, Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter ended September 30, 2021; comparisons are with Q3 and the first nine months of 2020 unless noted. SunCoke produces coke and operates coal and materials logistics terminals. Its U.S. coke sales are largely under long-term take-or-pay contracts, primarily with Cleveland-Cliffs Steel and U.S. Steel. The company also began commercial foundry coke and export coke sales in 2021.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $366.5 million | $302.2 million | $1,090.7 million | $1,022.9 million |
| Operating income | $41.4 million | $12.0 million | $113.5 million | $64.9 million |
| Net income (loss) | $24.1 million | $(1.4) million | $34.8 million | $12.3 million |
| Net income (loss) attributable to SunCoke | $23.0 million | $(2.7) million | $30.7 million | $8.7 million |
| Adjusted EBITDA | $73.9 million | $47.8 million | $212.5 million | $168.9 million |
| Cash from operations | $79.4 million | $74.5 million | $184.0 million | $123.1 million |
Q3 operating margin was approximately 11.3%, versus 4.0% a year earlier; nine-month operating margin was approximately 10.4%, versus 6.3%. Adjusted EBITDA is a non-GAAP measure and should not be treated as a substitute for GAAP earnings.
Revenue growth reflected higher domestic coke volumes and logistics activity, as well as increased energy and operating/licensing revenue. Logistics’ largely fixed cost base helped lift its margins as volumes increased. Q3 domestic coke production was 1.041 million tons and sales were 1.056 million tons; domestic capacity utilization was 100%. Logistics handled 4.940 million tons, versus 3.346 million tons in Q3 2020.
Balance sheet, debt and liquidity
- At September 30, 2021, cash was $54.6 million; total assets were $1.593 billion and total equity was $523.7 million.
- Total borrowings were $614.7 million before unamortized debt issuance costs; reported debt and financing obligation was $600.9 million, including the current financing-obligation portion. Long-term debt and financing obligation on the balance sheet was $597.8 million.
- The company had $102.0 million outstanding on its $350 million revolving facility, with $235.9 million available after facility letters of credit. It reported compliance with applicable debt covenants.
- In June 2021, SunCoke issued $500 million of 4.875% senior secured notes due 2029 and redeemed all $587.3 million of 7.500% notes due 2025. The refinancing also extended the revolver maturity to June 2026 and reduced its capacity by $50 million. Nine-month results included a $31.9 million loss on extinguishment of debt.
- Nine-month capital expenditures were $52.1 million. Cash dividends paid were $15.1 million. The board declared a further $0.06-per-share dividend payable in December 2021.
Changes, outlook and risks
- Management raised 2021 Adjusted EBITDA guidance in July to $255–$265 million, from $215–$230 million, citing stronger CMT volumes amid increased global coal demand and higher API2 prices. After Q3, it expected to modestly exceed the high end of the revised range. Management also expected 2021 capital expenditures of approximately $90 million.
- Management attributed stronger results to higher coke and logistics volumes, successful export and foundry coke initiatives, and stronger export coal markets. U.S. steel production utilization rose from 75% in January to 85% in September; management expected it to remain stable in Q4. It expected approximately 10 million tons of domestic logistics throughput in 2021, compared with about 9 million in 2020.
- Customer and market concentration remain relevant: coke sales rely heavily on Cliffs Steel and U.S. Steel, while logistics volumes and pricing are exposed to coal, steel, energy and seaborne export-market conditions. The filing also cites COVID-19 uncertainty, customer or supplier distress, aging equipment, operating and environmental compliance, and debt covenant risks.
- SunCoke’s estimated black lung liability was $67.3 million. A Department of Labor self-insurance reauthorization is subject to a disputed collateral requirement of $40.4 million; if the appeal fails, additional collateral could reduce liquidity. Management said other pending or threatened claims could be resolved unfavorably but did not expect them to materially affect consolidated financial statements.
- The company stated it had sufficient resources for working capital needs for at least the next 12 months and thereafter for the foreseeable future. It reported no material changes in risk factors from its 2020 Form 10-K and no material changes in market-risk exposure.
Key facts for investors to verify
- Whether the company actually exceeded the high end of its $255–$265 million 2021 Adjusted EBITDA guidance, and how much performance depended on unusually strong coal-export markets.
- Progress and commercial economics of foundry and export coke sales, including whether these markets diversify customer and contract exposure.
- Revolver availability, leverage and covenant headroom, and the cash-flow and interest-cost effects of the 2021 refinancing.
- Outcome of the black lung collateral appeal and any resulting liquidity impact.
- Logistics throughput and margins, domestic coke volumes, and customer demand under take-or-pay agreements.