August 2, 2018 - Warrior Met Coal, Inc. (NYSE:HCC) has announced results for the second quarter ended June 30, 2018. Warrior is the leading dedicated U.S.-based producer and exporter of high quality metallurgical coal for the global steel industry.
Warrior reported second quarter 2018 net income of $91.3 million, or $1.72 per diluted share, compared to second quarter 2017 net income of $129.9 million, or $2.46 per diluted share. Excluding one-time transaction and other expenses and incremental non-cash stock compensation expense, adjusted earnings per share for the second quarter 2018 were $1.81 per diluted share. The Company reported Adjusted EBITDA of $128.8 million for the second quarter 2018 compared to Adjusted EBITDA of $188.5 million for the second quarter of 2017.
Year-to-date, Warrior reported net income of $270.0 million, or $5.10 per diluted share, compared to net income of $238.2 million, or $4.52 per diluted share, in the same period of 2017. Excluding one-time transaction and other expenses and incremental non-cash stock compensation expense, adjusted earnings per share year-to-date were $5.24 per diluted share compared to the same period in 2017 of $4.73 per diluted share. Year-to-date Adjusted EBITDA was $345.3 million compared to $323.9 million in the same period of 2017.
“The market for high quality premium met coal continued to be robust in the second quarter, though moderated somewhat from the exceptional strength we have seen over the past year,” commented Walt Scheller, CEO of Warrior. “Given the strength of our financial and operating results in the first and second quarters, performance at our mines, ongoing global GDP growth, and strong demand for steel production, we are raising our guidance for the balance of the year. Warrior’s performance clearly demonstrates the unique value of our highly focused business strategy as a premium 'pure-play' met coal producer.”
The Company produced 1.9 million short tons of met coal in the second quarter of 2018, roughly equivalent to the amount produced in the second quarter of 2017. The actual production volume was better than expected as the Company entered the second quarter with a scheduled shut down for a week of maintenance at one of its mines. The Company continues to make good progress toward its nameplate annual capacity of eight million short tons. Halfway through the year, the Company produced and sold 4.0 million short tons of met coal without any longwall moves.
Total revenues were $322.6 million for the second quarter of 2018, including $315.0 million in mining revenues, which consisted of met coal sales of 1.9 million short tons at an average net selling price of $167 per short ton, net of demurrage and other charges. Average net selling price declined 7.8% compared to the second quarter of 2017, reflecting the higher met coal price environment last year due to Cyclone Debbie in Australia. Warrior capitalized on the strong pricing environment in the quarter by achieving a gross price realization of 100%. Since January 2018, the Company’s gross price realization has represented a volume weighted-average calculation of the Company's daily realized price per ton based on gross sales, which excludes demurrage and other charges, as a percentage of the Platts Premium Low Volatility (“LV”) Free-On-Board (“FOB”) Australia Index price (the “Platts Index”).
Cost of sales for the second quarter of 2018 were $178.5 million, or 56.7% of mining revenues, and included mining costs, transportation and royalty costs. Mining costs were higher in the second quarter of 2018 than in the same period last year primarily due to the continued ramp up of mining activities and incremental costs associated with the scheduled week of maintenance that was previously announced.
Selling, general and administrative expenses for the second quarter of 2018 were $13.5 million, or 4.2% of total revenues, including $3.0 million of incremental non-cash stock compensation expense associated with the vesting of shares in connection with the May secondary offering that was not in the Company's prior guidance. Transaction and other expenses were $1.0 million in the second quarter of 2018 and were related to the completion of the two secondary equity offerings by certain existing stockholders discussed below. Depreciation and depletion costs for the second quarter of 2018 were $21.1 million, or 6.5% of total revenues. Warrior incurred interest expense of $9.8 million during the second quarter of 2018. The Company did not incur any income tax expense for the second quarter of 2018 due to its utilization of its net operating losses (“NOLs”).
Cash Flow and Liquidity
The Company continued to generate strong cash flows from operating activities in the second quarter of 2018 of $132.5 million, compared to $161.4 million in the second quarter of 2017. Net working capital, excluding cash, decreased by $16.0 million from the first quarter of 2018, primarily due to lower accounts receivable on lower sales volumes and lower pricing. Capital expenditures for the second quarter of 2018 were $32.9 million, resulting in free cash flow of $99.6 million. Cash flows used in financing activities increased by $363.1 million for the quarter when compared to the prior year period primarily due to the special dividend paid in April 2018 and the stock repurchase in connection with the secondary equity offerings discussed below.
The Company’s available liquidity as of June 30, 2018 was $150.5 million, consisting of cash and cash equivalents of $55.1 million and $95.4 million of available borrowings under its Asset-Based Revolving Credit Agreement, net of outstanding letters of credit of $4.6 million.
In light of the Company's successful performance in the first and second quarters of 2018, its NOL carryforwards, and the expected market conditions for the remainder of 2018, Warrior is increasing its guidance for the full year 2018 as indicated below.
The Company’s guidance for capital expenditures consists of sustaining capital spending of approximately $70 - $83 million, including regulatory and gas requirements, and discretionary capital spending of $30 - $37 million for various operational improvements.
The Company’s outlook is subject to many risks that may impact performance, such as market conditions in the steel and met coal industries, overall global economic and competitive conditions, all as more fully described under "Forward-Looking Statements."
Key factors that may affect the Company's outlook include:
The Company does not provide reconciliations of its outlook for cash cost of sales (free-on-board port) to cost of sales in reliance on the unreasonable efforts exception provided for under Item 10(e)(1)(i)(B) of Regulation S-K. The Company is unable, without unreasonable efforts, to forecast certain items required to develop the meaningful comparable Generally Accepted Accounting Principles ("GAAP") cost of sales. These items typically include non-cash asset retirement obligation accretion expenses, mine idling expenses and other non-recurring indirect mining expenses that are difficult to predict in advance in order to include a GAAP estimate.
Special Dividend and Secondary Equity Offerings
On April 3, 2018, the Company used the net proceeds of its offering of $125 million 8.00% Senior Secured Notes due 2024, together with cash on hand, to declare a special cash dividend of approximately $6.53 per share of Warrior’s common stock, par value $0.01 per share, totaling an aggregate payment of $350 million, which was paid on April 20, 2018, to stockholders of record as of the close of business on April 13, 2018.
On May 10, 2018, an underwritten secondary offering of 8,000,000 shares of the Company's common stock by certain of the Company's existing stockholders, of which the Company repurchased from the underwriter 500,000 shares of common stock totaling $12.1 million, was consummated. In addition, on June 14, 2018, an underwritten secondary offering of 5,000,000 shares of the Company's common stock by certain of the Company's existing stockholders was consummated. The Company did not receive any proceeds from either secondary offering during the second quarter.
Regular Quarterly Dividend
On July 24, 2018, the board of directors of the Company declared a regular quarterly cash dividend of $0.05 per share, totaling approximately $2.7 million, which will be paid on August 10, 2018 to stockholders of record as of the close of business on August 3, 2018.
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