Suncoke Energy, Inc. quarterly report, Q2 FY2020

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SunCoke Energy, Inc. — Q2 2020 Form 10-Q

Reporting period: Three and six months ended June 30, 2020. SunCoke produces coke for steelmakers and operates coal and materials handling terminals. Its segments are Domestic Coke, Brazil Coke and Logistics. Results reflect the COVID-19 disruption to steel and coal markets.

Financial results

  • Q2 revenue: $338.0 million, down 17% from $407.5 million. Operating income was $24.9 million versus $21.6 million; operating margin was approximately 7.4% versus 5.3%. Net income was $7.8 million versus $3.3 million; net income attributable to SunCoke was $6.5 million versus $2.3 million. Diluted EPS was $0.08 versus $0.03.
  • Q2 Adjusted EBITDA: $59.0 million, down from $63.1 million. Domestic Coke EBITDA increased to $61.6 million from $56.3 million; Logistics fell to $3.0 million from $11.8 million; Brazil Coke was $3.2 million versus $4.3 million. Adjusted EBITDA is a non-GAAP measure.
  • First-half results: Revenue was $720.7 million versus $798.8 million; operating income was $52.9 million versus $51.6 million; net income was $13.7 million versus $15.5 million; and SunCoke-attributable net income was $11.4 million versus $12.1 million. Adjusted EBITDA was $121.1 million versus $130.4 million. A $2.9 million gain on debt extinguishment benefited first-half 2020 pretax income.
  • Cash flow and investment: First-half operating cash flow was $48.6 million, up from $35.6 million, partly due to working-capital timing and lower coal prices. Capital expenditures were $36.9 million versus $53.1 million. Cash declined $16.0 million to $81.1 million.
  • Debt and liquidity: Debt and financing obligations totaled $771.1 million at June 30, compared with $782.9 million at year-end. The company had $143.3 million drawn on its $400 million revolving facility and $244.9 million of availability; facility letters of credit were $11.8 million. It was in compliance with debt covenants.
  • Other measures: Q2 Domestic Coke sales volume was 977,000 tons versus 1.03 million; capacity utilization was 94% versus 97%. Logistics handled 2.853 million tons versus 5.592 million. The six-month effective tax rate was 47.9%, including $6.5 million of deferred tax expense from revaluation of certain deferred tax assets; a CARES Act carryback generated a $1.5 million tax benefit.

Material changes and developments

  • Lower coal prices reduced coke revenue through contractual pass-throughs, while lower coal costs and operating expenses supported Domestic Coke EBITDA. COVID-related customer supply relief reduced second-quarter volumes. Improved Indiana Harbor oven performance also supported Domestic Coke results.
  • Logistics revenue and EBITDA contracted sharply amid weak export and domestic coal markets, COVID-related disruption and the loss of Foresight Energy business after its March 2020 Chapter 11 filing. CMT handled Foresight tons under a new contract with Javelin and was negotiating a longer-term agreement.
  • In July 2020, SunCoke agreed to reduce 2020 coke deliveries by about 200,000 tons to AK Steel and about 300,000 tons to AM USA in exchange for contract extensions. Amended minimum delivery commitments are approximately 3.8 million tons in 2020, 3.7 million in 2021 and 3.3 million in 2022 through expiration. AM USA withdrew its force majeure notice.
  • The company repurchased $7.0 million of shares in the first quarter and suspended further repurchases during Q2. It paid $10.0 million of dividends in the first half. A further $0.06-per-share dividend was declared in August, payable September 1, 2020.

Outlook, risks and contingencies

  • Management revised 2020 guidance to Adjusted EBITDA of $190–$200 million, operating cash flow of approximately $116–$136 million, and capital expenditures of approximately $80 million, including about $12 million for the foundry-coke growth project. The EBITDA outlook reflects a $40–$50 million reduction from prior expectations.
  • Management expected it would take substantial time for steel production to normalize and said the duration, severity and possible resurgence of COVID-19 made the outlook uncertain. A workforce reduction was expected to generate about $10 million of savings in 2021. SunCoke expected to be positioned to sell foundry and by-product industrial coke in 2021.
  • The Department of Labor proposed increasing collateral for certain legacy black-lung self-insurance obligations from $8.4 million to $40.4 million. SunCoke appealed; an unsuccessful appeal could require additional collateral and reduce liquidity. The estimated black-lung liability was $55.9 million at June 30.
  • Principal risks include COVID-19 effects on steel customers and logistics volumes, customer financial distress or contract changes, coal and steel market weakness, customer concentration, and the company’s ability to maintain liquidity and service debt. The filing says other pending claims could be resolved unfavorably but management did not expect material financial impact; prior environmental consent-decree projects were completed.

Key facts for investors to verify

  • Whether steel demand, coke deliveries and customer operating rates recover as assumed in the 2020 guidance, and whether amended contracts provide durable volume and revenue visibility.
  • Whether logistics volumes recover and SunCoke secures a longer-term CMT agreement for the former Foresight business.
  • Actual operating cash flow, capital spending and revolver usage versus guidance, including any liquidity effect from the black-lung collateral appeal.
  • Progress and expected costs or returns from the foundry-coke project, and the realization of planned 2021 cost savings.
  • Changes in debt covenant headroom, ratings outlook and shareholder distributions; Moody’s maintained a B1 rating with a negative outlook.