Warrior Met Coal, Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020; financial statements are unaudited. Warrior is a U.S. producer and exporter of metallurgical coal for the global steel industry, operating Mine No. 4 and Mine No. 7 in Alabama.
Financial performance and position
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Total revenue | $163.7 million | $397.6 million | $390.4 million | $775.9 million |
| Operating income (loss) | $(5.3) million | $147.9 million | $25.2 million | $304.7 million |
| Net income (loss) | $(9.2) million | $125.5 million | $12.4 million | $235.9 million |
| Operating margin | (3.3)% | 37.2% | 6.4% | 39.3% |
| Operating cash flow | Not reported separately | Not reported separately | $53.0 million | $357.8 million |
Q2 coal sales were 1.335 million metric tons, versus 2.032 million a year earlier; average selling price was $119.15 per ton, versus $190.66. Cash cost of sales was $97.35 per ton, compared with $100.64. For the first half, coal sales volume was 2.981 million tons versus 3.933 million, average selling price was $127.62 versus $192.50, and cash cost was $94.16 versus $98.26 per ton.
At June 30, cash and cash equivalents were $220.7 million, short-term investments $8.5 million, and total liquidity $267.8 million, including $47.1 million available under the ABL Facility. Long-term debt was $379.5 million, comprising $343.4 million of 8% senior secured notes due 2024 and $40.0 million drawn on the ABL Facility, net of debt discount. The ABL also had $9.4 million of letters of credit outstanding. Total current assets were $519.3 million and current liabilities $131.1 million. Stockholders’ equity was $775.0 million.
Capital expenditures were $48.8 million and deferred mine development costs were $8.7 million in the first half. Cash increased $27.3 million to $220.7 million from year-end, including $25.5 million of net financing cash inflow. First-half operating cash flow was substantially below 2019; working capital included a $45.6 million increase in inventories.
Material changes versus prior period
- Q2 revenue fell 58.8% year over year, reflecting lower coal volumes and a $71.51 per-ton decline in average selling price. Management attributed the volume and price pressure to weak steelmaking demand and COVID-19 impacts.
- Q2 shifted from substantial operating and net income to an operating loss and net loss. First-half net income declined to $12.4 million from $235.9 million.
- First-half 2019 results included $17.5 million of other income from Walter Canada settlement proceeds and a $9.8 million loss on early debt extinguishment. First-half 2020 included $1.8 million of additional settlement proceeds.
- The company drew $70 million under its ABL in March as a precaution, then repaid $30 million in June; $40 million remained outstanding at quarter-end.
Outlook, commentary and risks
- Warrior withdrew its full-year 2020 guidance because of uncertainty over COVID-19’s duration and effects. Management said it is managing operating costs, working capital, capital spending, liquidity and cash flows conservatively.
- The mines remained operating at filing time, with safety measures in place. Management warned that the pandemic could further affect demand, prices, margins, customers’ ability to perform or pay, supply chains, transport, port access and capital-project schedules.
- The planned $25 million Blue Creek development was largely delayed until at least early 2021; minimal project spending was expected in 2020. The project’s timing and financing remain uncertain.
- The stock repurchase program was temporarily suspended. The company maintained its $0.05-per-share quarterly dividend and declared another $0.05 dividend in July, while noting future dividends remain subject to board discretion and liquidity.
- Management stated that cash, operating cash flows and ABL availability were expected to fund debt service and planned operating and capital needs for at least 12 months, but warned prolonged disruption could require additional liquidity. The company was in compliance with applicable ABL covenants at June 30 and was not then subject to the springing fixed-charge coverage test.
- Other material risks include met-coal price volatility, global steel demand, mining and permitting risks, debt service, reclamation obligations, customer and transport concentration, and uncertainty in access to financing. Management reported no environmental accruals other than mine reclamation obligations and no accrual for miscellaneous litigation.
Key facts for investors to verify
- Subsequent quarterly coal prices, sales volumes, production and customer demand, particularly as COVID-19 affects steel markets.
- Cash generation, inventory levels, liquidity and ABL borrowing-base availability; quarter-end liquidity was $267.8 million.
- Ability to service the 8% notes and variable-rate ABL borrowings, and continued compliance with debt covenants.
- Timing, cost and financing plan for Blue Creek, and whether the project delay changes expected returns.
- Whether the regular dividend can be sustained and when, if ever, share repurchases resume.
- Receipt of the expected approximately $24.3 million AMT-credit refunds in 2020 and any further Walter Canada settlement proceeds.