Warrior Met Coal, Inc. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018; comparisons are with the corresponding 2017 periods. Warrior is a U.S. producer and exporter of metallurgical coal, operating two underground Alabama mines. Results are unaudited.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Total revenue | $273.3 million | $312.0 million | $1,017.6 million | $929.3 million |
| Operating income | $62.7 million | $82.8 million | $351.1 million | $356.9 million |
| Net income | $52.6 million | $119.7 million | $322.6 million | $357.9 million |
| Diluted EPS | $1.00 | $2.27 | $6.09 | $6.79 |
| Adjusted EBITDA (non-GAAP) | $94.1 million | $107.3 million | $439.4 million | $431.4 million |
| Segment Adjusted EBITDA | $97.7 million | $113.4 million | $456.4 million | $439.9 million |
- Q3 coal sales revenue fell $38.1 million, mainly because sales volume declined by 395,000 metric tons to 1.513 million tons. Average selling price rose to $175.09 per ton from $158.78. Production increased to 1.650 million tons from 1.470 million.
- For the first nine months, coal sales revenue rose $97.0 million, reflecting 451,000 more tons sold and a $2.13 increase in average selling price per ton. Sales were 5.143 million tons; production was 5.303 million.
- Cash cost of sales per ton increased to $109.99 from $99.10 in Q3 and to $103.78 from $96.85 for the nine-month period. Management cited ramp-up spending, transportation and royalty costs, longwall-move amortization, and maintenance.
- Operating margin, calculated as operating income divided by revenue, was approximately 23% in Q3 versus 27% a year earlier, and 35% for nine months versus 38%. Q3 net income was also lower partly because 2017 included a $37.6 million tax benefit; Warrior reported no income tax expense in 2018 due to use of net operating loss carryforwards.
Cash flow, liquidity and debt
- Nine-month operating cash flow was $428.6 million, compared with $343.1 million in 2017. Investing cash outflow was $79.2 million, primarily capital expenditures of $79.6 million. Financing cash outflow was $254.7 million, including $358.0 million of dividends and $12.1 million of share repurchases, partly offset by debt proceeds.
- Cash and cash equivalents were $130.2 million at September 30, up from $35.5 million at year-end 2017. Management reported liquidity of $225.6 million, including $95.4 million of ABL availability; no ABL borrowings were outstanding and $4.6 million of letters of credit were outstanding.
- Total debt carrying value was $467.6 million, including $475.0 million principal of 8% senior secured notes due November 2024 and a $1.5 million promissory note. Long-term debt was $466.1 million. The notes were issued in part to fund the $350 million special dividend paid in April.
- On October 15, 2018, after quarter-end, Warrior amended and restated its ABL facility, increasing commitments by $25 million to $125 million, extending maturity to October 2023, and reducing interest margins and certain fees.
Outlook, commentary and risks
- Management expected full-year 2018 capital expenditures of $100–$120 million: $70–$83 million sustaining and $30–$37 million discretionary. Discretionary projects include a new Mine No. 7 portal and operational improvements, with expected benefits primarily in 2019 and beyond. Blue Creek development spending was excluded.
- Management believed operating cash flow, cash on hand and ABL availability would fund debt service and planned operating and capital needs for at least the next 12 months.
- The board declared a regular $0.05-per-share quarterly dividend for payment in November 2018. Future dividends and repurchases remain discretionary. The $40 million repurchase authorization had $27.9 million remaining at quarter-end; no shares were repurchased in Q3.
- Key exposures include volatile global steel and met-coal demand and prices, mine operating and geological risks, transportation costs and availability, labor and input costs, environmental and safety regulation, reclamation obligations, customer credit risk, and the ability to maintain liquidity and comply with debt covenants. Coal sales pricing is generally set on short-term contracts. Natural gas swaps are used for economic hedging but are not designated as accounting hedges.
- Warrior reported no accrued environmental or miscellaneous litigation liabilities at quarter-end, no liability for minimum transportation throughput requirements, and compliance with applicable ABL covenants. It stated that ordinary-course litigation was not expected to have a material adverse effect. No material changes to previously disclosed risk factors were reported.
Most important facts for investors to verify
- Whether coal prices, shipment volumes and customer demand sustain revenue, particularly given lower Q3 sales volume and the change in gross price realization benchmark methodology in 2018.
- Whether production ramp-up, maintenance, royalties and transportation costs continue to pressure per-ton costs and margins.
- Cash generation and liquidity after the large special dividend, alongside $475 million of 8% notes and upcoming debt service.
- Delivery, timing and returns of the planned capital projects, including the Mine No. 7 portal; Blue Creek development is not included in the stated capital budget.
- Capacity to sustain regular dividends and any future buybacks while funding capital needs and meeting debt-facility restrictions.