Suncoke Energy, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. SunCoke produces coke for steelmakers and operates coal and bulk-materials logistics terminals. Its U.S. coke sales are primarily under long-term take-or-pay contracts with pass-through provisions for key costs.
Financial results and liquidity
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $407.5m | $367.0m | $798.8m | $717.5m |
| Operating income | $21.6m | $34.7m | $51.6m | $65.8m |
| Net income | $3.3m | $11.4m | $15.5m | $24.4m |
| Net income attributable to SunCoke | $2.3m | $4.2m | $12.1m | $12.9m |
| Adjusted EBITDA | $63.1m | $67.3m | $130.4m | $131.3m |
| Operating cash flow | $0.3m | $28.0m | $35.6m | $85.3m |
Q2 operating margin was approximately 5.3% versus 9.5% a year earlier; net margin was approximately 0.8% versus 3.1%. Six-month operating margin was approximately 6.5% versus 9.2%. Q2 diluted EPS was $0.03 versus $0.06; six-month diluted EPS was $0.18 versus $0.20.
At June 30, cash was $102.2m, total debt and financing obligations were $833.1m carrying value (including $852.0m total borrowings before discount and issuance costs), and total equity was $722.8m. Revolving credit availability was $261.2m. The company reported compliance with debt covenants. Six-month capital expenditures were $53.1m; cash declined $43.5m to $102.2m.
Changes versus comparable periods
- Revenue grew 11% in Q2 and 11% for the first half, mainly from higher coal prices passed through in Domestic Coke. Higher pass-through revenue did not translate proportionately into profit.
- Domestic Coke Adjusted EBITDA increased to $56.3m in Q2 from $52.9m; capacity utilization was 97% versus 94%. Higher coal prices helped, partly offset by lower coal-to-coke yields, including effects of heavy rainfall.
- Logistics Adjusted EBITDA fell to $11.8m from $19.7m in Q2 as lower transloading volumes offset improved mix and pricing. Six-month handled tons declined to 11.4m from 12.8m.
- Operating cash flow fell sharply year over year, principally from higher coal inventories and prices, receivables, and timing of a $19.1m customer payment received July 1. Management said inventory was expected to normalize in the second half.
- Q2 and first-half GAAP earnings included $4.4m and $4.9m, respectively, of Partnership transaction costs. Q2 2018 included a $5.4m loss on the sale of the VISA SunCoke equity investment, affecting comparability.
Transaction, outlook, and risks
- On June 28, SunCoke acquired the remaining public units of SunCoke Energy Partners in exchange for 24.8m newly issued SunCoke shares; a further 0.6m shares settled the final prorated distribution. The Partnership became wholly owned, and its incentive distribution rights were eliminated. The transaction was accounted for as an equity transaction, with no income-statement gain or loss. Public-unit ownership is now consolidated under SunCoke; the filing says this increases the estimated annual effective tax rate by approximately 8 percentage points.
- 2019 guidance: Adjusted EBITDA of $266m–$276m, with $226m–$232m attributable to SunCoke; net income guidance was $40m–$47m. Planned 2019 capital expenditures were $110m–$120m, including approximately $40m–$48m for the Indiana Harbor oven rebuild.
- Management said weaker steel prices and lower coal export volumes were not expected to materially affect full-year results, citing take-or-pay contracts. However, customers face global steel overcapacity, and management anticipated lower 2019 export volumes than in 2018.
- Operating risks include coal supply and quality, weather and transport disruptions, oven reliability, steel and coal market cyclicality, customer concentration, and environmental compliance. Coal export price indices declined substantially in the first half of 2019; lower thermal-coal export pricing contributed to reduced logistics volumes.
- Environmental matters include a Granite City project completed in June 2019, later than its February target, with discussions ongoing with government entities regarding timing. The Indiana Harbor consent decree includes capital projects already underway; its $2.5m civil penalty was paid in 2018. Management said other pending or threatened claims were not expected to have a material adverse financial impact, though some could be resolved unfavorably.
Most important facts for investors to verify
- Whether coal inventories and operating cash flow normalize in the second half as management expected.
- Progress, cost, and operational effect of the Indiana Harbor oven rebuild and whether full-year capital expenditure guidance remains appropriate.
- Whether Domestic Coke yield performance recovers after weather-related coal moisture effects, and whether logistics volumes stabilize amid weaker export markets.
- Performance against 2019 Adjusted EBITDA guidance, including the effect of the higher post-transaction tax burden and the change in noncontrolling interests.
- Developments in environmental compliance discussions and other contingencies, plus debt covenant headroom and revolver availability.