November 1, 2018 - Warrior Met Coal, Inc. (NYSE:HCC) (“Warrior” or the “Company”) has announced results for the third quarter ended September 30, 2018. Warrior is the leading dedicated U.S.-based producer and exporter of high quality metallurgical (“met”) coal for the global steel industry.
Warrior reported third quarter 2018 net income of $52.6 million, or $1.00 per diluted share, compared to third quarter 2017 net income of $119.7 million, or $2.27 per diluted share, which included a $37.6 million, or $0.71 per diluted share, income tax benefit reflecting the impact of the favorable Internal Revenue Service Private Letter Ruling the Company received in the third quarter of 2017. Excluding one-time transaction and other expenses, adjusted earnings per share for this quarter were $1.06 per diluted share. The Company reported Adjusted EBITDA of $94.1 million for the third quarter 2018 compared to Adjusted EBITDA of $107.3 million in the third quarter of 2017.
Year-to-date, Warrior reported net income of $322.6 million, or $6.09 per diluted share, compared to net income of $357.9 million, or $6.79 per diluted share, in the same period of 2017. Excluding one-time transaction and other expenses, adjusted earnings per share year-to-date were $6.30 per diluted share compared to the same period in 2017 of $7.03 per diluted share. Year-to-date Adjusted EBITDA was $439.4 million compared to $431.4 million in the same period of 2017.
“The market for high quality premium met coal remained strong in the third quarter, with robust customer demand continuing to be supported by steel production in our key markets,” commented Walt Scheller, CEO of Warrior. “Warrior is performing in line with our increased guidance for the year as we continue to benefit from a price environment supported by a tight supply/demand balance and favorable Chinese policies. With the recent successful completion of two scheduled longwall moves, our success in maintaining high levels of production during this time was the result of good planning, preparation, communication, and outstanding work by our employees.”
The Company produced 1.8 million short tons of met coal in the third quarter of 2018, compared to 1.6 million short tons produced in the third quarter of 2017. Production levels were reduced somewhat as a result of two longwall moves, both of which were completed slightly better than expected and on schedule. The Company continues to make good progress toward its nameplate annual capacity of eight million short tons. In the first nine months of the year, the Company produced 5.8 million short tons of met coal.
Total revenues were $273.3 million for the third quarter of 2018, including $264.9 million in mining revenues, which consisted of met coal sales of 1.7 million short tons at an average net selling price of $159 per short ton, net of demurrage and other charges. Average net selling price rose 10.2% compared to the third quarter of 2017, reflecting the strength of the prevailing market conditions. Warrior capitalized on the strong pricing environment in the quarter by achieving a gross price realization of 97% which was lower compared to prior periods primarily due to a rising price environment. Beginning in the first quarter of 2018, the Company’s gross price realization has been calculated as a volume weighted-average of its 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 third quarter of 2018 were $167.2 million, or 63.1% of mining revenues, and included mining costs, transportation and royalty costs. Mining costs were lower in the third quarter of 2018 than the same period last year primarily due to a decrease in met coal sales of 0.4 million short tons and the Port of Mobile, Alabama being closed for approximately three days due to Tropical Storm Gordon.
Selling, general and administrative expenses for the third quarter of 2018 were $7.4 million, or 2.7% of total revenues, which were $1.9 million less than the same period last year. Transaction and other expenses were $3.3 million in the third quarter of 2018 and were related to the completion of a secondary offering of common stock by certain existing stockholders. Depreciation and depletion costs for the third quarter of 2018 were $26.1 million, or 9.5% of total revenues. Warrior incurred interest expense of $10.1 million during the third quarter of 2018. The Company did not incur any income tax expense for the third quarter of 2018 due to its planned utilization of net operating losses (“NOLs”).
Cash Flow and Liquidity
The Company continued to generate strong cash flows from operating activities in the third quarter of 2018 of $102.3 million, compared to $116.1 million in the third quarter of 2017. Net working capital, excluding cash, decreased by $21.2 million from the second quarter of 2018, primarily due to higher accrued expenses associated with interest on its $475.0 million in aggregate principal amount of 8.00% Senior Secured Notes due 2024 (the “Notes”) and lower accounts receivable on lower sales volumes. Capital expenditures for the third quarter of 2018 were $24.2 million, resulting in free cash flow of $78.2 million.
The Company’s available liquidity as of September 30, 2018 was $225.6 million, consisting of cash and cash equivalents of $130.2 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 three quarters of 2018, its NOL carryforwards, and the expected market conditions for the remainder of 2018, Warrior is maintaining its guidance for the full year 2018 as outlined 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 outlook include:
HCC index pricing Planned longwall moves - 1 in Q4 Exclusion of other non-recurring costs
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.
Amended and Restated Credit Agreement
On October 16, 2018, the Company announced that it had amended and restated the Asset-Based Revolving Credit Agreement, (the “Amended and Restated Credit Agreement”). The Amended and Restated Credit Agreement, among other things, (i) increases the aggregate commitments available to be borrowed under the credit facility by $25.0 million to $125.0 million; (ii) extends the maturity date of the credit facility to October 15, 2023; (iii) decreases the applicable interest rate margins with respect to the loans and the applicable fees in connection with the issuance of letters of credit; and (iv) amends certain covenants and other terms and provisions.
On September 20, 2018, the Company announced that Moody’s Investors Service (“Moody’s”) has upgraded its Corporate Family Rating (“CFR”) to B2 from B3 with a Stable Outlook. According to Moody’s, the upgrade reflects the Company’s strong financial performance, including free cash flow generation, strong met coal prices, low financial leverage and changes in the Company’s stockholder base. The upgrade further reflects expectations that the Company will continue to demonstrate strong free cash flow through 2019.
Regular Quarterly Dividend
On October 23, 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 November 9, 2018 to stockholders of record as of the close of business on November 2, 2018.
On August 9, 2018, the Company announced the completion of an underwritten secondary offering of 2,204,806 shares of its common stock by certain of its existing stockholders. The Company did not receive any proceeds from the sale of shares in the offering.
Use of Non-GAAP Financial Measures
This release contains the use of certain U.S. non-GAAP financial measures. These non-GAAP financial measures are provided as supplemental information for financial measures prepared in accordance with GAAP. Management believes that these non-GAAP financial measures provide additional insights into the performance of the Company, and they reflect how management analyzes Company performance and compares that performance against other companies. These non-GAAP financial measures may not be comparable to other similarly titled measures used by other entities. The definition of these non-GAAP financial measures and a reconciliation of non-GAAP to GAAP financial measures are provided in the financial tables section of this release.
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