Warrior Met Coal, Inc. — 2019 Form 10-K Summary
Business context and reporting period
This is the annual report for the fiscal year ended December 31, 2019, not a standalone quarterly filing. Warrior is a single-reportable-segment U.S. producer and exporter of premium metallurgical coal for steelmaking, operating Mine No. 4 and Mine No. 7 in Alabama. Nearly all revenue comes from coal sales to international customers. The filing also provides unaudited quarterly results, including fourth-quarter 2019.
Financial and operating metrics
| Metric | FY 2019 | FY 2018 |
|---|---|---|
| Total revenue | $1.268 billion | $1.378 billion |
| Coal sales | $1.236 billion | $1.343 billion |
| Operating income | $383.4 million | $508.3 million |
| Net income | $301.7 million | $696.8 million |
| Adjusted EBITDA (non-GAAP) | $478.7 million | $601.0 million |
| Operating cash flow | $532.8 million | $559.4 million |
| Cash and cash equivalents at year-end | $193.4 million | $205.6 million |
- Coal production reached a record 7.684 million metric tons, up from 7.017 million; sales were a record 7.240 million metric tons, up from 6.931 million.
- Average net selling price declined to $170.72 per metric ton from $193.72; gross price realization was 98% of the Platts Index versus 97%.
- Cash cost of sales fell to $99.15 per metric ton from $103.35. Reported cost of sales rose slightly to $720.7 million as higher sales volume offset lower per-ton costs.
- Operating margin was approximately 30.2% of revenue, compared with 36.9% in 2018. Net margin was approximately 23.8%, compared with 50.6%.
- 2019 net income included $65.4 million of income tax expense; 2018 net income included a $225.8 million tax benefit from releasing the valuation allowance on deferred tax assets.
- Cash used in investing activities was $134.2 million, including $107.3 million of property, plant and equipment purchases and $23.4 million of mine development costs. Cash used in financing was $411.6 million, including dividends, debt retirement, lease repayments and share repurchases.
- Year-end working capital was $315.1 million. Available liquidity was approximately $309.5 million: $193.4 million cash plus $116.1 million ABL availability. No ABL loans were outstanding; the company reported covenant compliance.
- Debt consisted of $343.4 million principal of 8% secured notes due 2024 and $35.7 million of finance lease obligations. The notes’ balance-sheet carrying value was $339.2 million after unamortized discount; the ABL facility matures in 2023.
Material changes versus comparable periods
- Compared with 2018, revenue decreased 8.0%, operating income decreased 24.6%, and Adjusted EBITDA decreased 20.4%, despite record production and sales. Lower coal prices were the primary driver of lower revenue.
- Net income fell 56.7%, with the comparison significantly affected by the $225.8 million deferred-tax valuation allowance release in 2018. 2019 also included a $9.8 million loss on early debt extinguishment and $22.8 million of settlement proceeds recognized as other income.
- Average coal selling price fell by $23.00 per metric ton year over year, while sales volume increased by about 0.3 million metric tons. Cash cost per ton improved by $4.20.
- In 2019, the company retired $131.6 million principal of notes through tender and restricted-payment offers. The year-end notes principal was $343.4 million, down from $475.0 million at December 31, 2018.
- Fourth-quarter 2019 revenue was $204.9 million, operating income $24.1 million and net income $20.8 million, compared with $360.4 million, $157.2 million and $374.2 million, respectively, in fourth-quarter 2018. The prior-year quarter included the large tax valuation allowance release.
Outlook, management commentary, risks and unusual items
- Management described 2019 as a record operating year but noted weaker steel production and a substantial met-coal price decline in the second half. The Platts Index averaged $204.53 per metric ton in the first half and $150.83 in the second half, reaching about $132 in November.
- 2020 capital spending guidance was $125 million to $145 million, including $75 million to $85 million of sustaining capital and $50 million to $60 million of discretionary capital. Spending may be reduced if market or business conditions weaken.
- Blue Creek development is planned as a major growth project. The filing estimates $550 million to $600 million of investment over five years; 2020 development capital is planned at $25 million. Management expects first development coal in the third quarter of 2023 and longwall start-up in the second quarter of 2025. Projected capacity is about 3.9 million metric tons annually during its first ten years; these are expectations, not guarantees.
- Management expects to use substantial federal and state NOLs and estimated no federal cash income taxes for six to eight years under its long-term assumptions. NOL availability is subject to tax review and ownership-change limitations. A February 2020 rights agreement and existing share-transfer restrictions seek to protect NOLs and may constrain certain stock acquisitions.
- The company returned $240.4 million through dividends in 2019, including a special dividend, and reported $12.5 million of share repurchases during the year. The regular quarterly dividend is $0.05 per share but remains discretionary and subject to debt restrictions and business conditions.
- Key risks include volatile met-coal prices and steel demand, customer concentration (five largest customers generated 64.5% of 2019 sales), dependence on Alabama operations and a single rail carrier, mine safety and operational hazards, permits and environmental regulation, reclamation and black-lung obligations, and the financing, cost and execution risks of Blue Creek. The UMWA labor agreement expires March 31, 2021.
- Asset retirement obligations were $56.2 million at year-end; estimated black-lung liabilities, net of trust assets, were $32.5 million. Surety bonds for reclamation totaled $40.6 million, with $2.2 million for miscellaneous purposes. Management reported no material effect expected from ordinary-course litigation and no environmental accruals beyond asset retirement obligations.
- The financial statements received an unqualified audit opinion; management and the auditor reported effective internal control over financial reporting as of December 31, 2019.
Most important facts for investors to verify
- How sustained lower benchmark prices affect realized prices, margins, cash generation and dividend capacity.
- Whether customer concentration, contract renewals and customer credit quality change materially.
- Blue Creek’s final funding plan, permitting, schedule, capital requirements and economics against actual coal prices and costs.
- Available liquidity and compliance with ABL and notes covenants, including the ability to fund investment while servicing secured debt and leases.
- Assumptions supporting NOL utilization, expected cash taxes and the practical effects of the 382 transfer restrictions and rights agreement.
- Changes in reclamation estimates, black-lung claims, surety collateral requirements and the labor agreement ahead of its 2021 expiration.