Warrior Met Coal, Inc. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. The company produces and exports metallurgical coal from two underground Alabama mines. Comparisons with 2016 require caution: the company’s 2016 periods reflect a different accounting basis, and Mine No. 4 was not operating for part of that period.
Financial and operating performance
- Q3 revenue: $312.0 million, including $303.0 million of coal sales; Q3 2016 revenue was $52.9 million. Coal sales volume rose to 1.908 million metric tons from 0.503 million, while average realized price increased to $158.78 per ton from $88.26.
- Q3 profit: Operating income was $82.8 million (26.5% of revenue), versus an operating loss of $32.9 million a year earlier. Net income was $119.7 million, or $2.27 per diluted share, versus a net loss of $33.6 million. The Q3 result included a $37.6 million income tax benefit.
- Nine-month results: Revenue was $929.3 million, operating income $356.9 million (38.4% margin), and net income $357.9 million, or $6.79 per share. Sales were 4.692 million metric tons at an average $190.92 per ton; cash cost of sales was $96.85 per ton.
- Costs: Q3 cash cost of sales was $99.10 per ton, compared with $95.45 a year earlier. SG&A increased to $9.2 million from $4.5 million, reflecting public-company costs, additional salaried staff and stock compensation. Nine-month transaction and other costs included $12.9 million, primarily IPO-related.
- Cash flow: Nine-month operating cash flow was $343.1 million; investing cash outflow was $62.7 million, mainly capital expenditures; financing cash outflow was $197.6 million, primarily the $190.0 million special distribution and quarterly dividends. Cash and cash equivalents were $234.1 million at quarter-end.
- Liquidity and debt at September 30: Liquidity was $334.1 million, comprising $234.1 million cash and $100.0 million of unused ABL availability. There were no ABL borrowings. Debt was $4.4 million under an equipment note; current debt was $2.9 million. Current assets were $452.8 million and current liabilities $78.2 million.
- Capital returns: The company paid a $190.0 million special distribution in March and adopted a $0.05-per-share quarterly dividend. Two quarterly dividends totaling approximately $5.4 million were paid through September.
Material changes and outlook
- Results improved substantially year over year as both mines operated, sales volumes increased, and realized coal prices were higher. The comparison also reflects Mine No. 4’s prior-year idling and differing accounting periods.
- The reported Q3 tax benefit followed a favorable IRS private letter ruling on the use of tax net operating losses. The company estimated federal and state NOLs of approximately $1.8–$2.0 billion, but retained a valuation allowance against deferred tax assets. Management said a release could materially increase income and equity if profitability and coal-price expectations remained favorable. A further ownership change before April 1, 2018 could effectively eliminate the NOLs.
- Management expected a full-year 2017 effective tax rate of approximately 2%, before refundable alternative minimum tax credits and excluding changes in the deferred-tax valuation allowance.
- Management forecast 2017 capital spending of $97–$110 million, including sustaining, catch-up and discretionary projects, with most spending expected in the second half. It cited equipment upgrades intended to improve production efficiency and reliability. Management believed cash, operating cash flow and ABL availability would fund planned needs for at least 12 months.
- The Q3 benchmark index price for traditional customers was approximately $170.34 per ton, down 13% from Q2 and 41% from Q1 2017. Management anticipated quarterly pricing based on a lagged average of Platts premium low-vol and TSI premium coking coal indexes, while noting the method could change.
- Subsequent financing and dividend: On November 2, the company issued $350.0 million of 8.00% senior secured notes due 2024, with approximately $340.0 million net proceeds. Together with approximately $260.0 million cash, proceeds were designated for a $600.0 million special dividend, or $11.21 per share, payable November 22. This materially increases debt following quarter-end; the filing describes pro forma debt of approximately $344.4 million, net of issuance costs and including the equipment note.
- Key risks include volatile metallurgical-coal prices and steel demand, mining and equipment disruptions, transportation availability and costs, labor, environmental and reclamation obligations, and the ability to maintain liquidity and comply with debt covenants. The company reported no litigation accruals and no recorded liability for minimum throughput requirements at quarter-end.
Important facts for investors to verify
- Whether production, sales volumes and realized prices can be sustained as benchmark coal prices declined during 2017.
- Actual 2017 capital expenditures versus the $97–$110 million forecast, and the results of the planned equipment upgrades.
- Use and realizability of NOLs, the valuation allowance, and the potential effect of any ownership change before April 1, 2018.
- The completed notes offering and special dividend’s effect on cash, leverage, interest expense, covenant capacity and future capital returns.
- Whether operating cash generation and ABL availability remain adequate for working capital, reclamation commitments and capital needs.