Warrior Met Coal, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; unaudited. Warrior mines and exports metallurgical coal for steelmakers, with operations concentrated in Alabama. The comparable period is Q1 2019.
Key financial and operating metrics
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Total revenue | $226.7 million | $378.3 million |
| Operating income | $30.5 million | $156.8 million |
| Operating margin | 13.5% | 41.4% |
| Net income / diluted EPS | $21.5 million / $0.42 | $110.4 million / $2.14 |
| Operating cash flow | $21.0 million | $126.4 million |
| Capital expenditures | $22.8 million | $24.4 million |
| Cash and cash equivalents, period end | $256.7 million | $193.4 million at Dec. 31, 2019 |
| Total debt, period end | $409.4 million | $339.2 million at Dec. 31, 2019 |
- Coal sales were $221.3 million. Sales volume fell to 1.646 million metric tons from 1.901 million; average selling price fell to $134.47 per ton from $194.47. Gross price realization declined to 89% of the Platts Index from 98%.
- Cash cost of sales per ton improved to $91.55 from $95.71, but lower selling prices and volumes drove substantially lower earnings. Segment Adjusted EBITDA was $69.8 million versus $187.1 million.
- Cash provided by financing was $62.6 million, primarily reflecting a $70.0 million ABL draw. Cash used in investing was $20.2 million. Cash increased by $63.4 million during the quarter.
- Liquidity was reported as $302.8 million: $256.7 million cash plus $46.1 million available under the ABL Facility. The facility had $70.0 million drawn and $8.9 million of outstanding letters of credit. Current assets were $564.5 million and current liabilities $132.7 million.
- Debt included $343.4 million of 8% senior secured notes due 2024 and $70.0 million under the ABL Facility, which matures in 2023. Finance lease liabilities were $34.1 million. The company said it was compliant with applicable ABL covenants and was not subject to the springing fixed-charge coverage covenant at quarter end.
Material changes versus Q1 2019
- Revenue fell 40%, principally from a $60.00-per-ton reduction in average coal selling price and a 255,000-ton decline in sales volume. Production also declined, from 2.084 million to 1.904 million metric tons.
- Operating income and net income fell sharply. Depreciation and depletion increased by $6.5 million to $28.7 million, while cost of sales declined with lower volumes and lower unit costs.
- Operating cash flow declined to $21.0 million from $126.4 million. Receivables and inventory increased, contributing to working-capital use.
- Debt increased by $70.0 million following the precautionary ABL borrowing. Q1 2019 cash flows had instead included substantial debt retirement, and that quarter recorded a $9.8 million loss on early debt extinguishment.
Outlook, risks and other notable items
- COVID-19: The company continued operating its mines with additional health and safety measures, but warned that the pandemic could affect steel demand, coal prices and volumes, employees, suppliers, transportation, customers’ ability to pay, and capital projects. Management withdrew its full-year 2020 guidance because the duration and effects of the pandemic were uncertain.
- Capital allocation: The company drew $70.0 million on its ABL Facility to preserve financial flexibility, temporarily suspended its stock repurchase program, and delayed the budgeted $25.0 million Blue Creek development until at least July 1, 2020. Management said it was managing expenses, working capital, capital spending and liquidity conservatively.
- Blue Creek: Management described the project as a potential long-term growth investment, but development timing and financing are uncertain. The filing cites approximately 103.0 million metric tons of recoverable reserves and expected average capacity of 3.9 million metric tons annually over the first ten years if developed.
- Dividends: The company paid its regular $0.05-per-share quarterly dividend in March. A further $0.05-per-share dividend was declared on April 24, payable May 11; management cautioned that future dividends remain subject to Board discretion and liquidity conditions.
- Tax and unusual income: Q1 tax expense was $3.2 million and was described as noncash while the company continued to use NOLs. Under the CARES Act, it reclassified $11.3 million of AMT credits to current receivables and expected approximately $24.3 million of AMT-credit refunds in 2020. Other income included $1.8 million of settlement proceeds from legacy Walter Canada claims; further recovery is uncertain.
- Contingencies: The company reported $54.3 million of asset retirement obligations and $29.9 million of long-term black lung obligations. The Department of Labor proposed increasing collateral for legacy black lung liabilities to $39.8 million from $17.0 million; the company appealed. It reported no environmental or miscellaneous litigation accruals at quarter end and stated it believed pending litigation would not materially affect its financial statements.
- Principal risks include volatile metallurgical coal prices and global steel demand, customer and customer-concentration exposure, COVID-19 impacts, transportation constraints, Alabama operating concentration, regulatory and reclamation obligations, and the company’s ability to finance growth and service debt.
Important facts for investors to verify
- Reconcile operating cash flow: the cash flow statement reports $21.0 million, while the MD&A narrative states $22.7 million. The filing text does not explain this discrepancy clearly.
- Track coal prices, sales volumes, customer demand and collections, and any further COVID-19-related operating or shipping disruptions.
- Confirm liquidity, ABL availability and covenant compliance as conditions evolve, including the cost of variable-rate borrowings.
- Monitor Blue Creek’s revised schedule, financing needs and capital spending, and whether the suspended repurchase program or dividend policy changes.
- Follow the Department of Labor collateral appeal and the timing and receipt of expected AMT-credit refunds.