WARRIOR MET COAL, INC.
CONDENSED BALANCE SHEETS
(in thousands)
|
| | | | | | | | |
| | Successor |
| | September 30, 2017 (Unaudited) | | December 31, 2016 |
| | | | |
ASSETS | | | | |
Current assets: | | | | |
Cash and cash equivalents | | $ | 234,053 |
| | $ | 150,045 |
|
Short-term investments | | 17,501 |
| | 17,501 |
|
Trade accounts receivable | | 128,541 |
| | 65,896 |
|
Other receivables | | 19,881 |
| | 5,901 |
|
Inventories, net | | 33,902 |
| | 39,420 |
|
Prepaid expenses | | 18,958 |
| | 12,010 |
|
Total current assets | | 452,836 |
| | 290,773 |
|
Mineral interests, net | | 132,329 |
| | 143,231 |
|
Property, plant and equipment, net | | 514,066 |
| | 496,959 |
|
Other long-term assets | | 21,394 |
| | 16,668 |
|
Total assets | | $ | 1,120,625 |
| | $ | 947,631 |
|
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | |
Current liabilities: | | | | |
Accounts payable | | $ | 16,593 |
| | $ | 6,043 |
|
Accrued expenses | | 54,168 |
| | 47,339 |
|
Other current liabilities | | 4,538 |
| | 8,405 |
|
Current portion of long-term debt | | 2,936 |
| | 2,849 |
|
Total current liabilities | | 78,235 |
| | 64,636 |
|
Long-term debt | | 1,512 |
| | 3,725 |
|
Asset retirement obligations | | 98,232 |
| | 96,050 |
|
Other long-term liabilities | | 28,253 |
| | 30,253 |
|
Total liabilities | | 206,232 |
| | 194,664 |
|
Commitments and contingencies (Note 9) | |
| |
|
Stockholders’ Equity: | | | | |
Common stock, $0.01 par value per share (Authorized -140,000,000 shares, issued and outstanding - 53,446,284 and 53,442,532, respectively) | | 534 |
| | 533 |
|
Preferred stock, $0.01 par value per share (10,000,000 shares authorized, no shares issued and outstanding) | | — |
| | — |
|
Additional paid in capital | | 610,992 |
| | 802,107 |
|
Retained earnings (accumulated deficit) | | 302,867 |
| | (49,673 | ) |
Total stockholders’ equity | | 914,393 |
| | 752,967 |
|
Total liabilities and stockholders’ equity | | $ | 1,120,625 |
| | $ | 947,631 |
|
The accompanying notes are an integral part of these condensed financial statements.
WARRIOR MET COAL, INC.
CONDENSED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(Unaudited)
|
| | | | | | | | | | | | | | | | | | | | |
| Successor (Unaudited) | | | Predecessor |
| For the three months ended September 30, | | For the nine months ended September 30, | | For the six months ended September 30, | | | For the three months ended March 31, |
| 2017 | | 2016 | | 2017 | | 2016 | | | 2016 |
Revenues: |
| | | | | | | | | |
Sales | $ | 302,958 |
| | $ | 44,395 |
| | $ | 895,802 |
| | $ | 129,810 |
| | | $ | 65,154 |
|
Other revenues | 8,997 |
| | 8,496 |
| | 33,487 |
| | 14,555 |
| | | 6,229 |
|
Total revenues | 311,955 |
| | 52,891 |
| | 929,289 |
| | 144,365 |
| | | 71,383 |
|
Costs and expenses: | | | | | | | | | | |
Cost of sales (exclusive of items shown separately below) | 189,564 |
| | 51,787 |
| | 455,860 |
| | 155,653 |
| | | 72,297 |
|
Cost of other revenues (exclusive of items shown separately below) | 6,985 |
| | 6,998 |
| | 22,959 |
| | 12,124 |
| | | 4,698 |
|
Depreciation and depletion | 23,393 |
| | 22,538 |
| | 57,625 |
| | 38,359 |
| | | 28,958 |
|
Selling, general and administrative | 9,243 |
| | 4,516 |
| | 23,073 |
| | 10,331 |
| | | 9,008 |
|
Other postretirement benefits | — |
| | — |
| | — |
| | — |
| | | 6,160 |
|
Restructuring costs | — |
| | — |
| | — |
| | — |
| | | 3,418 |
|
Transaction and other costs | — |
| | — |
| | 12,873 |
| | 10,475 |
| | | — |
|
Total costs and expenses | 229,185 |
| | 85,839 |
| | 572,390 |
| | 226,942 |
| | | 124,539 |
|
Operating income (loss) | 82,770 |
| | (32,948 | ) | | 356,899 |
| | (82,577 | ) | | | (53,156 | ) |
Interest (expense), net | (640 | ) | | (694 | ) | | (1,890 | ) | | (1,128 | ) | | | (16,562 | ) |
Reorganization items, net | — |
| | — |
| | — |
| | — |
| | | 7,920 |
|
Income (loss) before income taxes | 82,130 |
| | (33,642 | ) | | 355,009 |
| | (83,705 | ) | | | (61,798 | ) |
Income tax (benefit) expense | (37,587 | ) | | — |
| | (2,881 | ) | | — |
| | | 18 |
|
Net income (loss) | $ | 119,717 |
| | $ | (33,642 | ) | | $ | 357,890 |
| | $ | (83,705 | ) | | | $ | (61,816 | ) |
Basic and diluted net income (loss) per share: | | | | | | | | | | |
Net income (loss) per share—basic and diluted | $ | 2.27 |
| | $ | (0.64 | ) | | $ | 6.79 |
| | $ | (1.59 | ) | | | |
Weighted average number of shares outstanding—basic and diluted | 52,777 |
| | 52,640 |
| | 52,727 |
| | 52,640 |
| | | |
Dividends per share: | $ | 0.05 |
| | $ | — |
| | $ | 3.66 |
| | $ | — |
| | | |
|
| | | | | | | |
| For the three months ended March 31, |
| 2020 | | 2019 |
| |
Revenues: | | | |
Sales | $ | 221,338 |
|
| $ | 369,681 |
|
Other revenues | 5,382 |
|
| 8,609 |
|
Total revenues | 226,720 |
|
| 378,290 |
|
Costs and expenses: |
| | |
Cost of sales (exclusive of items shown separately below) | 151,514 |
| | 182,628 |
|
Cost of other revenues (exclusive of items shown separately below) | 7,561 |
| | 7,745 |
|
Depreciation and depletion | 28,692 |
| | 22,233 |
|
Selling, general and administrative | 8,456 |
| | 8,905 |
|
Total costs and expenses | 196,223 |
| | 221,511 |
|
Operating income | 30,497 |
| | 156,779 |
|
Interest expense, net | (7,533 | ) | | (8,592 | ) |
Loss on early extinguishment of debt | — |
| | (9,756 | ) |
Other income | 1,822 |
| | — |
|
Income before income tax expense | 24,786 |
| | 138,431 |
|
Income tax expense | 3,241 |
| | 27,984 |
|
Net income | $ | 21,545 |
| | $ | 110,447 |
|
Basic and diluted net income per share: |
| | |
Net income per share—basic | $ | 0.42 |
| | $ | 2.14 |
|
Net income per share—diluted | $ | 0.42 |
| | $ | 2.14 |
|
Weighted average number of shares outstanding—basic | 51,106 |
| | 51,511 |
|
Weighted average number of shares outstanding—diluted | 51,273 |
| | 51,630 |
|
Dividends per share: | $ | 0.05 |
| | $ | 0.05 |
|
The accompanying notes are an integral part of these condensed financial statements.
WARRIOR MET COAL, INC.
CONDENSED BALANCE SHEETS
(in thousands)
|
| | | | | | | | |
| | March 31, 2020 (Unaudited) | | December 31, 2019 |
| | | | |
ASSETS | | | | |
Current assets: | | | | |
Cash and cash equivalents | | $ | 256,743 |
| | $ | 193,383 |
|
Short-term investments | | 8,500 |
| | 14,675 |
|
Trade accounts receivable | | 131,526 |
| | 99,471 |
|
Income tax receivable | | 24,274 |
| | 12,925 |
|
Inventories, net | | 117,563 |
| | 97,901 |
|
Prepaid expenses and other receivables | | 25,925 |
| | 25,691 |
|
Total current assets | | 564,531 |
| | 444,046 |
|
Mineral interests, net | | 107,432 |
| | 110,130 |
|
Property, plant and equipment, net | | 598,622 |
| | 606,200 |
|
Non-current income tax receivable | | — |
| | 11,349 |
|
Deferred income taxes | | 151,021 |
| | 154,297 |
|
Other long-term assets | | 17,568 |
| | 18,242 |
|
Total assets | | $ | 1,439,174 |
| | $ | 1,344,264 |
|
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | |
Current liabilities: | | | | |
Accounts payable | | $ | 54,620 |
| | $ | 46,436 |
|
Accrued expenses | | 63,476 |
| | 65,755 |
|
Short term financing lease liabilities | | 8,022 |
| | 10,146 |
|
Other current liabilities | | 6,608 |
| | 6,615 |
|
Total current liabilities | | 132,726 |
| | 128,952 |
|
Long-term debt | | 409,363 |
| | 339,189 |
|
Asset retirement obligations | | 54,307 |
| | 53,583 |
|
Long term financing lease liabilities | | 26,106 |
| | 25,528 |
|
Other long-term liabilities | | 31,550 |
| | 31,430 |
|
Total liabilities | | 654,052 |
| | 578,682 |
|
| |
| |
|
Stockholders’ Equity: | | | | |
Common stock, $0.01 par value per share (Authorized -140,000,000 shares as of March 31, 2020 and December 31, 2019, 53,387,591 issued and 51,165,750 outstanding as of March 31, 2020 and 53,293,449 issued and 51,071,608 outstanding as of December 31, 2019) | | 533 |
| | 533 |
|
Preferred stock, $0.01 par value per share (10,000,000 shares authorized, no shares issued and outstanding) | | — |
| | — |
|
Treasury stock, at cost (2,221,841 shares as of March 31, 2020 and December 31, 2019) | | (50,576 | ) | | (50,576 | ) |
Additional paid in capital | | 244,525 |
| | 243,932 |
|
Retained earnings | | 590,640 |
| | 571,693 |
|
Total stockholders’ equity | | 785,122 |
| | 765,582 |
|
Total liabilities and stockholders’ equity | | $ | 1,439,174 |
| | $ | 1,344,264 |
|
The accompanying notes are an integral part of these condensed financial statements.
WARRIOR MET COAL, INC.
CONDENSED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
(in thousands)
(Unaudited)
|
| | | | | | | | | | | | | | | | | | | |
| Common Stock | | Preferred Stock | | Additional Paid in Capital | | Retained Earnings (Accumulated deficit) | | Total Stockholders’ Equity |
Balance at December 31, 2016 (Successor) | $ | 533 |
| | $ | — |
| | $ | 802,107 |
| | $ | (49,673 | ) | | $ | 752,967 |
|
Net income | — |
| | — |
| |
|
| | 357,890 |
| | 357,890 |
|
Dividends paid ($3.66 per share) | — |
| | — |
| | (190,000 | ) | | (5,350 | ) | | (195,350 | ) |
Purchase accounting measurement period adjustment (See Note 3) | — |
| | — |
| | (3,525 | ) | | — |
| | (3,525 | ) |
Equity award modification (See Note 10) | — |
| | — |
| | 1,255 |
| | — |
| | 1,255 |
|
Stock compensation | — |
| | — |
| | 1,155 |
| | — |
| | 1,155 |
|
Common shares issued | 1 |
| | — |
| | — |
| | — |
| | 1 |
|
Balance at September 30, 2017 (Successor) (Unaudited) | $ | 534 |
| | $ | — |
| | $ | 610,992 |
| | $ | 302,867 |
| | $ | 914,393 |
|
|
| | | | | | | |
| For the three months ended March 31, |
| 2020 | | 2019 |
| |
Common Stock | | | |
Balance, beginning of period | $ | 533 |
| | $ | 533 |
|
Balance, end of period | 533 |
| | 533 |
|
Preferred Stock | | | |
Balance, beginning of period | — |
| | — |
|
Balance, end of period | — |
| | — |
|
Treasury Stock | | | |
Balance, beginning of period | (50,576 | ) | | (38,030 | ) |
Treasury stock purchase | — |
| | (1,970 | ) |
Balance, end of period | (50,576 | ) | | (40,000 | ) |
Additional Paid in Capital | | | |
Balance, beginning of period | 243,932 |
| | 239,827 |
|
Stock compensation | 1,605 |
| | 1,108 |
|
Other | (1,012 | ) | | (527 | ) |
Balance, end of period | 244,525 |
| | 240,408 |
|
Retained Earnings | | | |
Balance, beginning of period | 571,693 |
| | 510,282 |
|
Net income | 21,545 |
| | 110,447 |
|
Dividends paid | (2,598 | ) | | (2,606 | ) |
Balance, end of period | 590,640 |
| | 618,123 |
|
Total Stockholders' Equity | $ | 785,122 |
| | $ | 819,064 |
|
The accompanying notes are an integral part of these condensed financial statements.
WARRIOR MET COAL, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
| | | Successor (Unaudited) | | | Predecessor | For the three months ended March 31, |
| For the three months ended September 30, | | For the nine months ended September 30, | | For the six months ended September 30, | | | For the three months ended March 31, | 2020 | | 2019 |
| 2017 | | 2016 | | 2017 | | 2016 | | | 2016 | |
OPERATING ACTIVITIES | | | | | | | | | | | | | |
Net income (loss) | $ | 119,717 |
| | $ | (33,642 | ) | | $ | 357,890 |
| | $ | (83,705 | ) | | | $ | (61,816 | ) | |
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | | | | | | | | | | | |
Net income | | $ | 21,545 |
| | $ | 110,447 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | | | | |
Depreciation and depletion | 23,393 |
| | 22,538 |
| | 57,625 |
| | 38,359 |
| | | 28,958 |
| 28,692 |
| | 22,233 |
|
Deferred income tax (benefit) expense | (5,373 | ) | | — |
| | (5,373 | ) | | — |
| | | 18 |
| |
Deferred income tax expense | | 3,276 |
| | 27,984 |
|
Stock based compensation expense | 233 |
| | — |
| | 1,155 |
| | 125 |
| | | 390 |
| 1,733 |
| | 1,194 |
|
Non-cash reorganization items | — |
| | — |
| | — |
| | — |
| | | (18,882 | ) | |
Amortization of debt issuance costs and debt discount, net | 427 |
| | 454 |
| | 1,316 |
| | 830 |
| | | 10,164 |
| |
Amortization of debt issuance costs and debt discount/premium, net | | 351 |
| | 381 |
|
Accretion of asset retirement obligations | 940 |
| | 1,227 |
| | 2,839 |
| | 1,962 |
| | | 1,169 |
| 733 |
| | 812 |
|
Loss on early extinguishment of debt | | — |
| | 9,756 |
|
Changes in operating assets and liabilities: | | | | | | | | | | | | | |
Trade accounts receivable | (35,990 | ) | | 22,588 |
| | (62,645 | ) | | (5,453 | ) | | | 15,097 |
| (32,055 | ) | | (44,329 | ) |
Other receivables | (15,181 | ) | | (1,696 | ) | | (13,981 | ) | | (1,572 | ) | | | 1,070 |
| |
Income tax receivable | | — |
| | 297 |
|
Inventories | 37,003 |
| | (5,876 | ) | | 4,072 |
| | 8,801 |
| | | 677 |
| (17,326 | ) | | (10,823 | ) |
Prepaid expenses and other current assets | (2,274 | ) | | 1,369 |
| | (6,948 | ) | | (8,306 | ) | | | 13,020 |
| |
Prepaid expenses and other receivables | | (235 | ) | | 10,167 |
|
Accounts payable | 2,772 |
| | (1,544 | ) | | 10,550 |
| | (8,893 | ) | | | (15,338 | ) | 15,614 |
| | 10,640 |
|
Accrued expenses and other current liabilities | (9,015 | ) | | 1,111 |
| | 1,002 |
| | 29,704 |
| | | (16,083 | ) | (3,538 | ) | | (15,133 | ) |
Other | (543 | ) | | 992 |
| | (4,436 | ) | | 6,781 |
| | | 858 |
| 2,232 |
| | 2,782 |
|
Net cash provided by (used in) operating activities | 116,109 |
| | 7,521 |
| | 343,066 |
| | (21,367 | ) | | | (40,698 | ) | |
Net cash provided by operating activities | | 21,022 |
| | 126,408 |
|
INVESTING ACTIVITIES | | | | | | | | | | | | | |
Purchase of property, plant and equipment | (34,408 | ) | | (2,435 | ) | | (62,671 | ) | | (8,449 | ) | | | (5,422 | ) | (22,775 | ) | | (24,395 | ) |
Deferred mine development costs | | (3,677 | ) | | (5,578 | ) |
Proceeds from sale of property, plant and equipment | — |
| | — |
| | — |
| | 34 |
| | | — |
| — |
| | 234 |
|
Cash paid for acquisition, net of cash acquired | — |
| | 76 |
| | — |
| | (24,031 | ) | | | — |
| |
Cash receipt from escrow agreement | — |
| | (3,493 | ) | | | | 9,364 |
| | | | |
Proceeds from termination of life insurance policy | — |
| | 29,857 |
| | — |
| | 12,857 |
| | | — |
| |
Sale of short-term investments | | 14,733 |
| | — |
|
Purchases of short-term investments | — |
| | (17,505 | ) | | — |
| | (17,505 | ) | | | — |
| (8,500 | ) | | — |
|
Net cash provided by (used in) investing activities | (34,408 | ) | | 6,500 |
| | (62,671 | ) | | (27,730 | ) | | | (5,422 | ) | |
Net cash used in investing activities | | (20,219 | ) | | (29,739 | ) |
FINANCING ACTIVITIES | | | | | | | | | | | | | |
Dividends paid | (2,677 | ) | | — |
| | (195,350 | ) | | — |
| | | — |
| (2,598 | ) | | (2,606 | ) |
Proceeds from rights offering | — |
| | — |
| | — |
| | 200,000 |
| | | — |
| |
Proceeds from issuance of debt | — |
| | — |
| | — |
| | — |
| | | 15,723 |
| |
Borrowings under ABL Facility | | 70,000 |
| | — |
|
Retirements of debt | (763 | ) | | (765 | ) | | (2,294 | ) | | (1,530 | ) | | | (285 | ) | — |
| | (140,272 | ) |
Net cash transfers to Parent | — |
| | — |
| | — |
| | — |
| | | (13,290 | ) | |
Debt issuance costs paid | — |
| | (463 | ) | | — |
| | (4,978 | ) | | | (8,388 | ) | |
Principal repayments of finance lease obligations | | (3,833 | ) | | (1,957 | ) |
Common shares repurchased | | — |
| | (1,970 | ) |
Other | | (1,012 | ) | | (527 | ) |
Net cash provided by (used in) financing activities | (3,440 | ) | | (1,228 | ) | | (197,644 | ) | | 193,492 |
| | | (6,240 | ) | 62,557 |
| | (147,332 | ) |
Net increase (decrease) in cash and cash equivalents and restricted cash | 78,261 |
| | 12,793 |
| | 82,751 |
| | 144,395 |
| | | (52,360 | ) | 63,360 |
| | (50,663 | ) |
Cash and cash equivalents and restricted cash at beginning of period | 157,146 |
| | 131,602 |
| | 152,656 |
| | — |
| | | 84,462 |
| 193,383 |
| | 206,405 |
|
Cash and cash equivalents and restricted cash at end of period | $ | 235,407 |
| | $ | 144,395 |
| | $ | 235,407 |
| | $ | 144,395 |
| | | $ | 32,102 |
| $ | 256,743 |
| | $ | 155,742 |
|
The accompanying notes are an integral part of these condensed financial statements.
WARRIOR MET COAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
NINETHREE MONTHS ENDED SEPTEMBER 30, 2017MARCH 31, 2020 (UNAUDITED)
Note 1—Business and Basis of Presentation
Description of the Business
Warrior Met Coal, LLCInc. (the “Company” or, for the periods beginning as of April 1, 2016, the “Successor”"Company") was formed on September 3, 2015 by certain Walter Energy, Inc. (“Walter Energy” or the “Parent”) lenders under the 2011 Credit Agreement, dated as of April 1, 2011 (the “2011 Credit Agreement”) and the noteholders under the 9.50% Senior Secured Notes due 2019 (such lenders and noteholders, collectively, “Walter Energy’s First Lien Lenders”) in connection with the acquisition by the Company of certain core operating assets of Walter Energy under section 363 under Chapter 11 of Title 11 (the "Chapter 11 Cases") of the U.S. Bankruptcy Code (“U.S. Bankruptcy Code”) in the Northern District of Alabama, Southern Division (the "Bankruptcy Court"). These operating assets acquired and liabilities assumed are referred to as the “Predecessor” for all periods on or before March 31, 2016. The Company and its Predecessor areis a U.S. based producerenvironmentally and exportersocially minded supplier to the global steel industry. The Company is dedicated entirely to mining non-thermal met coal used as a critical component of metallurgical (“met”) coal for a diversified customer base of blast furnace steel producers located primarilyproduction by metal manufacturers in Europe, South America and South America.Asia. The Company also generates ancillary revenues from the sale of natural gas extracted as a byproduct from the underground coal mines and royalty revenues from leased properties.
On November 5, 2015, Walter Energy and certain of its wholly owned U.S. subsidiaries (collectively, the "Walter Energy Debtors") entered into an asset purchase agreement (as amended, the “Asset Purchase Agreement”) with the Company, pursuant to which, among other things, the Company, on behalf of Walter Energy’s First Lien Lenders, agreed to acquire the Predecessor through a credit bid of $1.1 billion and a release of the liens under the 2011 Credit Agreement and the 9.50% Senior Secured Notes due 2019 (“Walter Energy First Lien Obligations”), to assume certain liabilities of the Walter Energy Debtors and to pay cash consideration in accordance with sections 363 and 365 of the U.S. Bankruptcy Code (the “Asset Acquisition”). On January 8, 2016, the Bankruptcy Court approved the Asset Acquisition, which closed on March 31, 2016.
In connection with the Asset Acquisition, the Company also conducted rights offerings to Walter Energy’s First Lien Lenders and certain qualified unsecured creditors to purchase newly issued Class B Units of the Company, which diluted the Class A Units on a pro rata basis (the “Rights Offerings”). Proceeds from the Rights Offerings were used to pay certain costs associated with the Asset Acquisition and for general working capital purposes.
Special Distribution
On March 31, 2017, the Company's board of managers declared a cash distribution payable to holders of its then outstanding Class A Units, Class B Units and Class C Units as of March 27, 2017, resulting in distributions to such holders in the aggregate amount of $190.0 million (the “Special Distribution”). The Special Distribution was funded with available cash on hand and was paid to Computershare Trust Company, N.A., as disbursing agent, on March 31, 2017.
Corporate Conversion and Initial Public Offering
On April 12, 2017, in connection with the Company’s initial public offering (“IPO”), Warrior Met Coal, LLC filed a certificate of conversion, whereby Warrior Met Coal, LLC effected a corporate conversion from a Delaware limited liability company to a Delaware corporation and changed its name to Warrior Met Coal, Inc. In connection with this corporate conversion, the Company filed a certificate of incorporation. Pursuant to the Company’s certificate of incorporation, the Company is authorized to issue up to 140,000,000 shares of common stock $0.01 par value per share and 10,000,000 shares of preferred stock $0.01 par value per share. All references in the unaudited interim condensed financial statements to the number of shares and per share amounts of common stock have been retroactively recast to reflect the corporate conversion.
On April 19, 2017, the Company completed its IPO whereby the selling stockholders named in the Registration Statement on Form S-1 (File No. 333-216499) sold 16,666,667 shares of common stock at a price to the public of $19.00 per share. The Company did not receive any proceeds from the sale of common stock in the IPO, and will not receive any proceeds from the exercise of the underwriters’ option to purchase additional shares of common stock, if any. All of the net proceeds from the IPO were received by the selling stockholders.
WARRIOR MET COAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)
NINE MONTHS ENDED SEPTEMBER 30, 2017 (UNAUDITED)
The aggregate net proceeds to the selling stockholders in the IPO were $296.9 million, net of underwriting discounts and commissions of $19.8 million. The Company has paid cumulative offering expenses of $15.9 million on behalf of the selling stockholders. Upon the closing of the IPO, 53,442,532 shares of common stock were outstanding. On April 13, 2017, our common stock began trading on the New York Stock Exchange under the ticker symbol "HCC" and on April 19, 2017, we closed our IPO.
Basis of Presentation
Prior to the closing of the Asset Acquisition on March 31, 2016, the Company had no operations and nominal assets.
The accompanying financial statements have been presented on a condensed consolidated basis for the “Successor” periods subsequent to the Asset Acquisition, which include the three and nine months ended September 30, 2017, the three and six months ended September 30, 2016 and on a condensed combined basis for the “Predecessor” periods prior to the Asset Acquisition, which includes the three months ended March 31, 2016. The financial information of the Company has been separated by a vertical line on the face of the financial statements to identify these different bases of accounting for Predecessor and Successor periods.
The accompanying financial statements are presented in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In our opinion, the financial statements include all adjustments (consisting of normal recurring accruals) necessary in order to make the financial statements not misleading. For further information, refer to the financial statements and related notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2019 (the "2019 Annual Report"). Operating results for the three and nine months ended September 30, 2017 (Successor) and the three and six months ended September 30, 2016 (Successor)March 31, 2020 are not necessarily indicative of the final results that may be expected for the year ended December 31, 2017. These unaudited financial statements should be read in conjunction with2020. The balance sheet at December 31, 2019 has been derived from the audited financial statements for the year ended December 31, 20162019 included in the final prospectus for the IPO dated April 12, 2017 and filed pursuant to Rule 424(b)(4) with the Securities and Exchange Commission (the “SEC”) on April 14, 2017 (the “IPO Prospectus”), which is part of our registration statement on Form S-1 (File No. 333-216499).
Predecessor Presentation
The Predecessor’s condensed combined financial statements for the three months ended March 31, 2016, have been “carved-out” from the accounting records of Walter Energy.
Historically, the Predecessor did not operate as an independent standalone company. For periods subsequent to filing the Chapter 11 Cases and prior to March 31, 2016, the Predecessor applied the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 852, Reorganizations, in preparing its condensed combined financial statements. ASC 852 requires that the financial statements distinguish transactions and events that are directly associated with the reorganization from the ongoing operations of the business. Accordingly, certain revenues, expenses, realized gains and losses and provisions for losses that were realized or incurred in the Chapter 11 Cases have been recorded in a reorganization line item on the Condensed Combined Statements of Operations.
Preparation of the condensed combined financial statements for the three months ended March 31, 2016, included making certain adjustments necessary to reflect all costs of doing business to present the historical records on a basis as if the Predecessor had been a separate stand alone entity. These adjustments include, for example, allocations of Parent overhead and selling, general and administrative expenses.
The historical costs and expenses reflected in the condensed combined financial statements include an allocation for certain corporate functions historically provided by the Parent. Substantially all of the Predecessor’s senior management were employed by the Parent and certain functions critical to the Predecessor’s operations were centralized and managed by the Parent. Historically, the centralized functions have included executive senior management, financial reporting, financial planning and analysis, accounting, shared services, information technology, tax, risk management, treasury, legal, human resources, and strategy and development. The costs of each of these services has been allocated to the Predecessor on the basis of the Predecessor’s relative headcount, revenue and total assets to that of the Parent. These cost allocations were $7.8 million for the three months ended March 31, 2016 (Predecessor).
WARRIOR MET COAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)
NINE MONTHS ENDED SEPTEMBER 30, 2017 (UNAUDITED)
All intracompany transactions have been eliminated. The net effect of the settlement of transactions between the Predecessor, the Parent and other affiliates of the Parent, together with cash transfers to and from the Parent’s cash management accounts are reflected in the Condensed Statements of Changes in Stockholders' Equity and Parent Net Investment as net transfers to Parent and in the Condensed Statements of Cash Flows as a financing activity.
The allocation methodologies have been described in the notes to the financial statements where appropriate, and management considers the allocations to be reasonable. The financial information included herein may not necessarily reflect the financial position, results of operations and cash flows of the Predecessor in the future or what they would have been had the Predecessor been a separate, standalone entity during the periods presented.2019 Annual Report.
Note 2—Summary of Significant Accounting Policies
OurThe Company's significant accounting policies are consistent with those disclosed in Note 2 to ourits audited financial statements included in our IPO Prospectus.the 2019 Annual Report, except for changes related to new accounting pronouncements described in "New Accounting Pronouncements."
Cash and Cash Equivalents and Restricted Cash
The following table provides a reconciliation of cash and cash equivalents and restricted cash reported within the Condensed Balance Sheets that sum to the total of the same such amounts shown in the Condensed Statements of Cash Flows (in thousands):
|
| | | | | | | |
| Successor |
| September 30, 2017 | | December 31, 2016 |
Cash and cash equivalents | $ | 234,053 |
| | $ | 150,045 |
|
Restricted cash included in other long-term assets | 1,354 |
| | 2,611 |
|
Total cash and cash equivalents and restricted cash included in the Statements of Cash Flows | $ | 235,407 |
| | $ | 152,656 |
|
Cash and cash equivalents include short-term deposits and highly liquid investments that have original maturities of three months or less when purchased and are stated at cost, which approximates fair value. As of September 30, 2017 (Successor) and December 31, 2016 (Successor), restricted cash included in other long-term assets in the Condensed Balance Sheet represents amounts funded to an escrow account as collateral for coal royalties due under certain underground coal mining lease contracts.
Short-Term Investments
Instruments with maturities greater than three months, but less than twelve months, are included in short-term investments. The Company purchases United States Treasury ("Treasury") bills with maturities ranging from six to twelve months which are classified as held to maturity and are carried at amortized cost, which approximates fair value. The Company also purchases fixed income securities and certificates of deposits with varying maturities that are classified as available for sale and are carried at fair value. Securities classified as held to maturity securities are those securities that management has the intent and ability to hold to maturity.
As of September 30, 2017 (Successor)March 31, 2020, short-term investments consisted of $8.5 million in cash and fixed income securities. As of December 31, 2016 (Successor),2019, the Company’s short-term investments consisted of $17.5$14.7 million in Treasury bills with a maturity of six months. These Treasury bills werecash and fixed income securities. The short-term investments are posted as collateral for the self-insured black lung related claims asserted by or on behalf of former employees of Walter Energy, Inc. ("Walter Energy") and its subsidiaries, which were assumed inby the Asset AcquisitionCompany and relate to periods prior to March 31, 2016.
New Accounting PronouncementsRevenue Recognition
In September 2015,Revenue is recognized when performance obligations under the FASB issued Accounting Standards Update ("ASU") 2015-16, “Business Combinations (Topic 805): Simplifyingterms of a contract with the AccountingCompany's customers are satisfied; for Measurement-Period Adjustments,” which eliminates the requirement that an acquirer in a business combination account for measurement-period adjustments retrospectively. Instead, an acquirer will recognize a measurement-period adjustment during the period in which it determines the amountall contracts this occurs when control of the adjustment. The guidancepromised goods have been transferred to its customers. For coal shipments to domestic customers via rail, control is effective for public business entities for fiscal years beginning after December 15, 2015, and interim periods within those fiscal
transferred when the railcar is loaded. For coal shipments to international customers via ocean vessel, control is transferred when the vessel is loaded at the Port of Mobile, Alabama. For natural gas
WARRIOR MET COAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)
NINETHREE MONTHS ENDED SEPTEMBER 30,MARCH 31, 2020 (UNAUDITED)
sales, control is transferred when the gas has been transferred to the pipeline. Revenue is disaggregated between coal sales within the Company's mining segment and natural gas sales which is included in all other revenues, as disclosed in Note 13.
Since February 2017, (UNAUDITED)
years. We adopted the amendmentsCompany has had an arrangement with XCoal Energy & Resource ("XCoal") to serve as XCoal's strategic partner for exports of ASU 2015-16, effective January 1, 2017. We recognized a $3.5 million measurement-period adjustmentlow-volatility hard coking coal. Under this arrangement, XCoal takes title to and markets coal that the Company would historically have sold on the spot market, in an amount of the greater of (i) 10% of the Company's total production during the applicable term of the arrangement or (ii) 250,000 metric tons. During the three months ended March 31, 2017 (Successor), which we reflected prospectively (see Note 3). 2020 and 2019, XCoal accounted for approximately $44.3 million, or 19.9% of total revenues, and $94.9 million, or 25.8% of total revenues, respectively.
Trade Accounts Receivable and Allowance for Credit Losses
Trade accounts receivable represent customer obligations that are derived from revenue recognized from contracts with customers. Credit is extended based on an evaluation of the individual customer's financial condition. The Company maintains trade credit insurance on the majority of its customers and the geographic regions of coal shipments to these customers. In some instances, the Company requires letters of credit, cash collateral or prepayments from its customers on or before shipment to mitigate the risk of loss. These efforts have consistently resulted in the Company recognizing no historical credit losses. The Company also has never had to have a claim against its trade credit insurance policy.
In May 2014,order to estimate the FASB issued ASU 2014-09 “Revenue from Contracts with Customers”allowance for credit losses on trade accounts receivable, the Company utilizes an aging approach in which potential impairment is calculated based on how long a receivable has been outstanding (e.g., current, 1-31, 31-60, etc.). The new standard requiresCompany calculates an entity to recognize revenue upon transferexpected credit loss rate based on the Company’s historical credit loss rate, the risk characteristics of promised goods or services toour customers, in an amount that reflectsand the consideration to whichcurrent metallurgical coal and steel market environments. As of March 31, 2020, the company expects to be entitled in exchangeestimated allowance for those goods or services. The guidance also requires additional disclosures aboutcredit losses was immaterial and did not have a material impact on the nature, amount, timing, and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. In August 2015, the FASB issued ASU 2015-14, “Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date,” which defers the effective date of ASU 2014-09 by one year. ASU 2015-09 is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period and permits early adoption on a limited basis. Company's financial statements.
New Accounting Pronouncements
The Company plans to adopt ASU 2014-09adopted Accounting Standards Update 2016-13, "Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments" as of January 1, 2018,2020 using the modified retrospective approach. BasedThe ASU requires the use of an “expected loss” model for instruments measured at amortized cost, in which companies will be required to estimate the lifetime expected credit loss and record an allowance to offset the amortized cost basis, resulting in a net presentation of the amount expected to be collected on the current status of the Company’s assessmentfinancial asset. The adoption of the new standard the Company doesdid not anticipate any significant changes to the current timing or method for recognizing revenue. Additionally, the Company does not anticipate the new standard to have a material impact on ourthe Company's financial statements, outside of the expanded disclosure requirements.including accounting policies, processes and systems.
Note 3—AcquisitionInventories, net
Inventories, net are summarized as follows (in thousands):
|
| | | | | | | |
| March 31, 2020 | | December 31, 2019 |
Coal | $ | 87,684 |
| | $ | 69,064 |
|
Raw materials, parts, supplies and other, net | 29,879 |
| | 28,837 |
|
Total inventories, net | $ | 117,563 |
| | $ | 97,901 |
|
Note 4—Income Taxes
For the three months ended March 31, 2020, the Company utilized a discrete period method to calculate taxes, as it does not believe that the annual effective tax rate method represents a reliable estimate given the current uncertainty surrounding the recent outbreak of the Predecessor
On November 5, 2015,novel coronavirus disease 2019 ("COVID-19") and its impact on the Walter Energy Debtors entered intoCompany's annual guidance. For the Asset Purchase Agreement withthree months ended March 31, 2020, the Company pursuant to which, among other things,had income tax expense of $3.2 million. The income tax expense represents a noncash expense as the Company on behalfcontinues to utilize its NOLs. The Company had income tax expense of Walter Energy’s First Lien Lenders, agreed to acquire the Predecessor via a credit bid and release of the liens on the Walter Energy First Lien Obligations. On January 8, 2016, the Bankruptcy Court approved the Asset Acquisition, which closed on March 31, 2016.
The cash consideration of $50.8$28.0 million included the funding of escrow accounts to be used to pay certain expenses on behalf of the Walter Energy Debtors, some of which required residual amounts contained in the escrow accounts to be refunded to the Company after a specified time period. The net cash paid for the Asset Acquisition was $24.1 million, which was $50.8 million of cash paid less cash and cash equivalents acquired of $26.7 million.
The purchase consideration has been allocated to the assets acquired and liabilities assumed based upon their estimated fair values at the date of the Asset Acquisition. During the first quarter of 2017, the Company completed the valuation of the assets and liabilities with the assistance of an independent third party and recorded a measurement-period adjustment to the preliminary purchase price allocation. The measurement-period adjustment was due to updated estimates for the acquired mineral interests including estimates for future royalty income, production volumes and timing which resulted in a $3.5 million decrease in fair value allocated to mineral interests as compared to the December 31, 2016 preliminary fair value. This also resulted in a decrease to additional paid in capital. The measurement-period adjustment was recorded during the first quarter of 2017 and had no impact on reported earnings for the three and nine months ended September 30, 2017 (Successor).March 31, 2019.
In determining the fair values of net assets acquired in the Asset Acquisition, the Company considered, among other factors, the analyses of the Predecessor’s historical financial performance and estimates of the future performance of the acquired business, as well as the highest and best use of the acquired assets.
Working capital, excluding inventory, and non-current restricted cash were recorded at the Predecessor’s carrying value, which is representative of the fair value on the date of acquisition. Inventory was valued at its net realizable value.
Mineral interest was recorded at fair value utilizing the income approach. The income approach utilized the Company’s operating projections as of the valuation date. Under the income approach, fair value was estimated based upon the present value of future cash flows. A number of significant assumptions and estimates were involved in forecasting the future cash flows including sales volumes and prices, costs to produce (including costs for labor, commodity supplies and contractors), transportation costs, capital spending, working capital changes and a risk adjusted, after-tax cost of capital (all of which generally constitute unobservable Level 3 inputs under the fair value hierarchy).
Property, plant and equipment, and other assets were recorded at fair values based on the cost and market approaches. The cost approach utilized trending and direct costing techniques to develop replacement costs. The market approach is based on independent secondary market data (which generally constitute Level 2 inputs under the fair value hierarchy).
WARRIOR MET COAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)
NINETHREE MONTHS ENDED SEPTEMBER 30,MARCH 31, 2020 (UNAUDITED)
On March 27, 2020, the President of the United States signed and enacted into law the Coronavirus Aid, Relief and Economic Security Act (the "CARES Act"). The CARES Act, among other things, provides temporary relief from certain aspects of the Tax Cuts and Jobs Act of 2017 (UNAUDITED)
Black lung obligationsthat had imposed limitations on the utilization of certain losses, interest expense deductions and asset retirement obligations were recorded at fair value using a combination of market data, operational data and discountedalternative minimum tax ("AMT") credits. The CARES Act also provides opportunities for businesses to improve their cash flows by obtaining refunds for prior taxable years and were adjusted byreducing their income and deferring payroll tax liabilities for the current taxable year. Specifically, Section 2305 of the CARES Act accelerates the ability to receive refunds of remaining AMT credits for tax years 2019, 2020 and 2021. As a discount rate factor reflectingresult, the Company recorded an adjustment of approximately $11.3 million to reclassify AMT credits from a non-current income tax receivable to a current market conditions atincome tax receivable, as the timeCompany now expects to receive these refunds this year. The Company now expects to receive approximately $24.3 million in 2020 for refunds of acquisition.AMT credits. The Company is continuing to evaluate the impact of the CARES Act on its business, financial results and disclosures.
Note 5—Debt
Debt consisted of the following tables summarize the final purchase price allocation, including the applicable measurement-period adjustments made upon finalization during the first quarter of 2017 (in thousands):
|
| | | | | | | | | | | | |
| | March 31, 2020 | | December 31, 2019 | | Weighted Average Interest Rate at March 31, 2020 | | Final Maturity |
Senior Secured Notes | | $ | 343,435 |
| | $ | 343,435 |
| | 8% | | 2024 |
ABL Borrowings | | 70,000 |
| | — |
| | 3.75% | | 2023 |
Debt discount/premium, net | | (4,072 | ) | | (4,246 | ) | | | | |
Total debt | | 409,363 |
| | 339,189 |
| | | | |
Less: current debt | | — |
| | — |
| | | | |
Total long-term debt | | $ | 409,363 |
| | $ | 339,189 |
| | | | |
|
| | | |
Final purchase price: | |
Cash paid | $ | 50,830 |
|
Fair value of First Lien Obligations relinquished in exchange for net assets of the Predecessor | 598,607 |
|
Total purchase price | $ | 649,437 |
|
Senior Secured NotesOn November 2, 2017, the Company issued $350.0 million aggregate principal amount of its 8.00% Senior Secured Notes due 2024 (the "Original Notes"). It then issued an additional $125.0 million in aggregate principal amount of its 8.00% Senior Secured Notes due 2024 (the “New Notes” and, together with the Original Notes, the "Notes") on March 1, 2018. The New Notes were issued as "Additional Notes" under the indenture dated as of November 2, 2017 (the "Original Indenture"), among the Company, the subsidiary guarantors party thereto and Wilmington Trust, National Association, as trustee and priority lien collateral trustee, as supplemented by the First Supplemental Indenture, dated as of March 1, 2018 (the "First Supplemental Indenture" and, the Original Indenture as supplemented thereby and by the Second Supplemental Indenture, dated as of March 2, 2018, the "Indenture"). The Notes mature on November 1, 2024 and interest is payable on May 1 and November 1 of each year.
Offers to Purchase the Notes |
| | | |
Final fair values of assets acquired and liabilities assumed: | |
Cash and cash equivalents | $ | 26,723 |
|
Trade and other receivables | 14,358 |
|
Inventories | 46,464 |
|
Prepaid expenses and other current assets | 30,722 |
|
Mineral interests | 144,224 |
|
Property, plant and equipment | 533,441 |
|
Other long-term assets | 28,865 |
|
Total assets | 824,797 |
|
Accounts payable | 10,470 |
|
Accrued expenses | 12,843 |
|
Other current liabilities | 24,044 |
|
Current debt | 2,879 |
|
Long-term debt | 5,758 |
|
Deferred income taxes | 1,400 |
|
Other long-term liabilities | 117,966 |
|
Total liabilities | 175,360 |
|
Total fair value of net assets acquired | $ | 649,437 |
|
On February 21, 2019, the Company commenced an offer to purchase (the “Restricted Payment Offer”), in cash, up to $150,000,000 principal amount of its outstanding Notes, at a repurchase price of 103% of the aggregate principal amount of such Notes, plus accrued and unpaid interest with respect to such Notes to, but not including, the date of repurchase (the “Restricted Payment Repurchase Price”). Concurrently with, but separate from, the Restricted Payment Offer, the Company commenced a cash tender offer (the “Tender Offer” and, together with the Restricted Payment Offer, the “Offers”) to purchase up to $150,000,000 principal amount of the Notes at a repurchase price of 104.25% of the aggregate principal amount of such Notes, plus accrued and unpaid interest to, but not including, the date of repurchase (the “TO Repurchase Price”). The Offers expired on March 22, 2019 (the “Expiration Date”).Supplemental Unaudited Pro Forma Financial Information
The following unaudited pro forma resultsRestricted Payment Offer
As of operations give effectthe Expiration Date, $1,900,000 aggregate principal amount of the Notes were validly tendered and not validly withdrawn pursuant to the Asset Acquisition as if it had occurred on January 1, 2015. This unaudited pro forma financial information should not be relied upon as necessarily being indicativeRestricted Payment Offer. Pursuant to the terms of the historical results that would have been obtained if the Asset Acquisition had actually occurred on that date, nor the results of operations in the future. The 2016 supplemental unaudited pro forma financial information was adjusted to (i) reflect the impact of certain fair value adjustments, including an adjustment to depreciation and depletion expense as a result of a change in the basis of Property, Plant and Equipment and Mineral Interests, (ii) eliminate historical interest expense related to the notes, loans and other debt that was not assumed by the Company as part of the Asset Acquisition, (iii) eliminate a gain on reorganization items associated with the Chapter 11 Cases and (iv) eliminate the Predecessor's historical other postretirement benefit expense associated with the Predecessor's historical other postretirement benefit obligations for retiree medical and life insurance benefits, which were not assumed by the Company.
Restricted Payment Offer:
WARRIOR MET COAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)
NINETHREE MONTHS ENDED SEPTEMBER 30, 2017MARCH 31, 2020 (UNAUDITED)
|
| | | | | | | | |
| | Predecessor |
| | For the three months ended March 31, 2016 |
(in thousands) | | As reported | | Pro forma |
Revenue | | $ | 71,383 |
| | $ | 71,383 |
|
Net loss | | $ | (61,816 | ) | | $ | (31,759 | ) |
(1) an automatic pro ration factor of 31.5789% was applied to the $1,900,000 aggregate principal amount of the Notes that were validly tendered and not validly withdrawn in the Restricted Payment Offer (rounded down to avoid the purchase of Notes in a principal amount other than in integrals of $1,000), which resulted in $599,000 aggregate principal amount of the Notes (the “RP Pro-Rated Tendered Notes”);
(2) the Company accepted all $599,000 aggregate principal amount of the RP Pro-Rated Tendered Notes for payment of the Restricted Payment Repurchase Price in cash; and
(3) the remaining balance of $1,301,000 aggregate principal amount of the Notes tendered that were not RP Pro-Rated Tendered Notes were not accepted for payment and were returned to the tendering holder of the Notes.
The Company consummated the Restricted Payment Offer on March 25, 2019.
Accordingly, pursuant to the terms of the Indenture, the Company was permitted to make one or more restricted payments in the form of special dividends to holders of the Company’s common stock and/or repurchases of the Company’s common stock in the aggregate amount of up to $299,401,000 (the "RP Basket") without having to make another offer to repurchase Notes. The Company used a portion of the RP Basket to pay a special cash dividend totaling approximately $230.0 million, which was paid to stockholders on May 14, 2019 and intends to use the remainder of the RP Basket to make repurchases under the Stock Repurchase Program (as defined below).
Tender Offer
As of the Expiration Date, $415,099,000 aggregate principal amount of the Notes were validly tendered and not validly withdrawn pursuant to the Tender Offer. Pursuant to the terms of the Tender Offer:
(1) an automatic pro ration factor of 31.5789% was applied to the $415,099,000 aggregate principal amount of the Notes that were validly tendered and not validly withdrawn in the Tender Offer (rounded down to avoid the purchase of Notes in a principal amount other than in integrals of $1,000), which resulted in $130,966,000 aggregate principal amount of the Notes (the “TO Pro-Rated Tendered Notes”);
(2) the Company accepted all $130,966,000 aggregate principal amount of the TO Pro-Rated Tendered Notes for payment of the TO Repurchase Price in cash; and
(3) the remaining balance of $284,133,000 aggregate principal amount of the Notes tendered that were not TO Pro-Rated Tendered Notes were not accepted for payment and were returned to the tendering holder of the Notes.
The Company consummated the Tender Offer on March 26, 2019.
In connection with the payments for the RP Pro-Rated Tendered Notes and the TO Pro-Rated Tendered Notes, the Company recognized a loss on early extinguishment of debt of $9.8 million during the three months ended March 31, 2019.
ABL Facility
On March 24, 2020, the Company borrowed $70.0 million in a partial draw of the ABL Facility (the “ABL Draw”) as a precautionary measure in order to increase the Company’s cash position and preserve financial flexibility in light of the current uncertainty resulting from the COVID-19 outbreak. In accordance with the terms of the ABL Facility, the proceeds from the ABL Draw will be available to be used, if needed, for working capital and general corporate purposes. The Company believes that the $256.7 million of cash on hand as of March 31, 2020, provides it with adequate liquidity in the current environment. The Company intends to retain these funds in cash to preserve liquidity amid the growing uncertainty surrounding the COVID-19 outbreak.
Note 4—Inventories, net6—Other Long-Term Liabilities
Inventories, net
Other long-term liabilities are summarized as follows (in thousands):
|
| | | | | | | |
| Successor |
| September 30, 2017 | | December 31, 2016 |
Coal | $ | 12,691 |
| | $ | 18,788 |
|
Raw materials, parts, supplies and other, net | 21,211 |
| | 20,632 |
|
Total inventories, net | $ | 33,902 |
| | $ | 39,420 |
|
Note 5—Income Taxes
For the three and nine months ended September 30, 2017 (Successor), the Company estimated its annual effective tax rate based on projected financial income for the full year at the end of the interim reporting period. The tax effect of unusual or infrequently occurring items, including effects of changes in tax laws or rates and changes in judgment about the realizability of deferred tax assets, are reported in the interim period in which they occur.
The Company recognized an income tax benefit of $37.6 million and $2.9 million for the three and nine months ended September 30, 2017 (Successor), respectively. The Company recognized no income tax expense for the three and six months ended September 30, 2016 (Successor) and recognized income tax expense of $18.0 thousand for the three months ended March 31, 2016 (Predecessor).
On March 31, 2016, the Company experienced an ownership change for purposes of Section 382 of the Internal Revenue Code of 1986, as amended (the "Code"). As a result of such ownership change, absent an applicable exception to such rules, an annual limitation, under Code Section 382 would apply, for federal and certain state income tax purposes, on the utilization of net operating loss carryforwards ("NOLs"). The Company had requested a private letter ruling ("PLR") from the Internal Revenue Service ("IRS") to clarify certain questions, that if the IRS ruled favorably on, would allow the Company to qualify for an exception to the aforementioned rules limiting its utilization of its NOLs. On September 18, 2017, the IRS issued such favorable PLR and, as such, the Company now believes it qualifies for an exception to such limitation rules. Prior to the issuance of the PLR, the Company operated and prepared its financial statements based on an assumption that the annual limitation on the utilization of the NOLs existed. Based on the receipt of the favorable PLR, the Company now believes that it qualifies for an exception to such NOL limitation rules and as such, no annual Code Section 382 limitation to the utilization of its federal NOLs applies. As a result of qualifying for such exception, the Company's federal and state NOLs were revised downward to approximately $1.8 to $2.0 billion as of September 30, 2017. Under the aforementioned exception to the Code Section 382 limitation, if the Company were to undergo a subsequent ownership change within two years of the Asset Acquisition, prior to April 1, 2018, its NOLs would effectively be reduced to zero. A subsequent ownership change could severely limit or eliminate the Company's ability to utilize its NOLs and other tax attributes. See "Part II, Item 1A. Risk Factors - We may be unable to generate sufficient taxable income from future operations, or other circumstances could arise, which may limit or eliminate our ability to utilize our significant tax NOLs or maintain our deferred tax assets" for additional discussion of this risk.
WARRIOR MET COAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)
NINETHREE MONTHS ENDED SEPTEMBER 30, 2017MARCH 31, 2020 (UNAUDITED)
In connection with the PLR, the Company made a year-to-date adjustment of $37.6 million, or $0.71 per share, in the third quarter of 2017 to reflect the change in application of Section 382 in computing income tax expense. The Company also recognized an income tax receivable of approximately $17.0 million, which represents the overpayment of estimated quarterly tax payments as a result of the change in estimated tax expense and refundable alternative minimum tax credits of approximately $9.7 million associated with capital expenditures. |
| | | | | | | |
| March 31, 2020 | | December 31, 2019 |
Black lung obligations | $ | 29,871 |
| | $ | 30,233 |
|
Other | 1,679 |
| | 1,197 |
|
Total other long-term liabilities | $ | 31,550 |
| | $ | 31,430 |
|
Note 7—Leases
The Company records deferred tax assetsprimarily enters into rental agreements for certain mining equipment that are for periods of 12 months or less, some of which include options to extend the extent these assets will more likely thanleases. Leases that are for periods of 12 months or less are not be realized.recorded on the balance sheet. The Company provides a valuation allowance for deferred tax assets when it is more likely than not that some portion or all of its deferred tax assets, will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income. The Company considers all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent financial performance in evaluating the realizability of its deferred tax assets. Many factors are considered which impact the Company's projections of future sustained profitability including risk associated with being a newly formed Company with a limited performance record and operating historyrecognizes lease expense on these agreements on a standalonestraight-line basis our abilityover the lease term. Additionally, the Company has certain finance leases for mining equipment that expire over various contractual periods. The leases have remaining lease terms of one to successfully implement our business strategiesfive years. These leases do not include an option to renew. Amortization expense for finance leases is included in depreciation and maximize profitable productiondepletion expense.
Supplemental balance sheet information related to leases was as follows (in thousands):
|
| | | | | | | |
| | March 31, 2020 | December 31, 2019 |
Finance lease right-of-use assets, net(1) | | $ | 39,516 |
| $ | 40,227 |
|
Finance lease liabilities | | | |
Current | | 8,022 |
| 10,146 |
|
Noncurrent | | 26,106 |
| 25,528 |
|
Total finance lease liabilities | | $ | 34,128 |
| $ | 35,674 |
|
| | | |
Weighted average remaining lease term - finance leases (in months) | | 42.7 |
| 44.7 |
|
Weighted average discount rate - finance leases(2) | | 5.86 | % | 6.02 | % |
(1) Finance lease right-of-use assets are recorded net of accumulated amortization of $7.8 million and other conditions which$4.8 million and are beyondincluded in property, plant and equipment, net in the Company's control, suchCondensed Balance Sheet as the health of the global economyMarch 31, 2020 and the global steelmaking industry, the level and volatility of met coal prices and the hazards and operating risks involved with mining. The Company has concludedBalance Sheet as of September 30, 2017 (Successor), thatDecember 31, 2019, respectively.
(2) When an implicit discount rate is not readily available in a lease, the valuation allowance was still needed onCompany uses its deferred tax assetsincremental borrowing rate based on information available at the weightcommencement date when determining the present value of the factors describe above. If it is later determined that the Company will more likely than not realize all, or a portion,lease payments.
The components of the deferred tax assets, the Company will adjust the valuation allowance in a future period. If for the remainder of 2017, the Company is able to successfully implement its business strategy, maximize profitable production, continue to have positive operating results and projections for met coal pricing stabilize and remain strong, the Company may release all or a portion of its valuation allowancelease expense were as early as the end of 2017, which could materially and favorably affect net income and stockholders' equity.
Results of operations of the Predecessor have historically been included in the federal and state income tax returns of the Parent. Accordingly, the income tax provision included in the Predecessor financial statements was calculated using a method consistent with a separate return basis, as if the Predecessor had been a separate taxpayer. Similarly, historical tax attributes (net operating losses, alternative minimum tax credits, etc.) have been allocated to the Predecessor’s business utilizing a reasonable method of allocation.
Note 6—Debt
On April 1, 2016, the Company entered into an Asset-Based Revolving Credit Agreement (the “ABL Facility”) with certain lenders and Citibank, N.A. (together with its affiliates, “Citibank”), as administrative agent and collateral agent, with an aggregate lender commitment to make a revolving loan of up to $50.0 million, subject to borrowing base availability. On January 23, 2017, the Company entered into Amendment No. 1 to the ABL Facility to, among other things, (i) increase the aggregate lender commitment to $100.0 million, (ii) reduce the applicable interest rate margins by 100 basis points ("bps"), (iii) permit the corporate conversion and (iv) allow the IPO to be consummated without triggering a change of control. On March 24, 2017, the Company entered into Amendment No. 2 to the ABL Facility to modify certain terms relating to the restricted payment covenant, which provides the Company with improved flexibility to pay dividends, including the Special Distribution. On May 15, 2017, the Company entered into Amendment No. 3 to the ABL Facility to, among other things, (i) allow for the posting of cash collateral to secure certain swap and hedging arrangements permitted under the ABL Facility and (ii) allow for the payment of dividends permitted under the ABL Facility within 60 days of declaration thereof. At September 30, 2017 (Successor), the Company had $100.0 million of availability under the ABL Facility.
In connection with the Asset Acquisition, the Company assumed a security agreement and promissory note, which had an outstanding balance of $4.4 million as of September 30, 2017 (Successor), of which $2.9 million was classified as a current obligation. The amount owed in respect of the promissory note was originally used for the purchase of underground mining equipment and such note is secured by the same mining equipment. The promissory note matures on March 31, 2019 and bears a fixed interest rate of 4.00% per annum. The Company is required to make monthly payments of principal and interest during the term of the promissory note.
See Note 16 for discussion of Amendment No. 4 to the ABL Facility entered into and the consummation of a private offering of $350.0 million aggregate principal amount of 8.00% Senior Secured Notes due 2024 subsequent to September 30, 2017.
follows (in thousands):
15 |
| | | | | | | | |
| | For the three months ended March 31, |
| | 2020 | | 2019 |
Operating lease cost(1): | | $ | 292 |
| | $ | 144 |
|
Finance lease cost: | | | | |
Amortization of leased assets | | 2,998 |
| | 1,957 |
|
Interest on lease liabilities | | 546 |
| | 13 |
|
Net lease cost | | $ | 3,836 |
| | $ | 2,114 |
|
(1) Includes leases that are for periods of 12 months or less.
WARRIOR MET COAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)
NINETHREE MONTHS ENDED SEPTEMBER 30, 2017MARCH 31, 2020 (UNAUDITED)
Maturities of lease liabilities were as follows (in thousands):
|
| | | | |
| | Finance Leases(1) |
2020 | | $ | 7,978 |
|
2021 | | 13,089 |
|
2022 | | 8,558 |
|
2023 | | 8,558 |
|
2024 | | 842 |
|
Thereafter | | — |
|
Total | | 39,025 |
|
Less: amount representing interest | | (4,897 | ) |
Present value of lease liabilities | | $ | 34,128 |
|
(1) Finance lease payments include $4.5 million of future payments required under signed lease agreements that have not yet commenced.
Supplemental cash flow information related to leases was as follows (in thousands):
|
| | | | | | | | |
| | For the three months ended March 31, |
| | 2020 | | 2019 |
Cash paid for amounts included in the measurement of lease liabilities: | | | | |
Operating cash flows from finance leases | | $ | 546 |
|
| $ | 13 |
|
Financing cash flows from finance leases | | $ | 3,833 |
| | $ | 1,957 |
|
Non-cash right-of-use assets obtained in exchange for lease obligations: | | | | |
Finance leases | | $ | 2,286 |
| | $ | 2,086 |
|
As of March 31, 2020, the Company had additional commitments for finance leases, primarily for mining equipment, that have not yet commenced of $4.5 million. These finance leases will commence between fiscal year 2020 and 2021 with lease terms of one to two years.
Note 7—8—Net Income (Loss) per Share
Basic and diluted net income (loss) per share was calculated as follows (in thousands, except per share data):
|
| | | | | | | |
| For the three months ended March 31, |
| 2020 | | 2019 |
Numerator: | | | |
Net income | $ | 21,545 |
| | $ | 110,447 |
|
Denominator: | | | |
Weighted-average shares used to compute net income per share—basic | 51,106 |
| | 51,511 |
|
Dilutive restrictive stock awards | 167 |
| | 119 |
|
Weighted-average shares used to compute net income per share—diluted | 51,273 |
| | 51,630 |
|
Net income per share—basic and diluted | $ | 0.42 |
| | $ | 2.14 |
|
Net income per share—diluted | $ | 0.42 |
| | $ | 2.14 |
|
WARRIOR MET COAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)
THREE MONTHS ENDED MARCH 31, 2020 (UNAUDITED)
|
| | | | | | | | | | | | | | | |
| Successor (Unaudited) |
| For the three months ended September 30, | | For the nine months ended September 30, | | For the six months ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Numerator: | | | | | | | |
Net income (loss) | $ | 119,717 |
| | $ | (33,642 | ) | | $ | 357,890 |
| | $ | (83,705 | ) |
Denominator: | | | | | | | |
Weighted-average shares used to compute net income (loss) per share—basic and diluted | 52,777 |
| | 52,640 |
| | 52,727 |
| | 52,640 |
|
Net income (loss) per share—basic and diluted | $ | 2.27 |
| | $ | (0.64 | ) | | $ | 6.79 |
| | $ | (1.59 | ) |
As of September 30, 2017 (Successor), there were 798,124 shares of commonEquity Plan
On February 13, 2020, the Company awarded 420,303 restricted stock issuedunit awards under our 2016the Company's 2017 Equity Incentive Plan (the "2016"2017 Equity Plan") to. These awards have certain directorsservice-based, performance-based and employees,market-based vesting conditions, as applicable. The service-based awards vest over a period of three years and the performance-based and market-based awards are based on the Company's performance in each of the three years. The Company recognized approximately $0.5 million in stock compensation expense associated with these awards for the three months ended March 31, 2020.
As of March 31, 2020, there were 248,294 restricted stock unit awards for which neither the performance nor market basedservice-based vesting conditions for these awards were not met as of the measurement date. As such, these commonawards were excluded from basic earnings per share. These awards had a 23,295 share impact on dilutive weighted average shares have beenfor the three months ended March 31, 2020. As of March 31, 2020, there were 454,130 restricted stock unit awards for which the performance-based and market-based vesting conditions were not met as of the measurement date and, as such, these awards were excluded from basic and diluted earnings per share. Based on the Company's closing share price on March 31, 2020, there were 141,243 restricted stock unit awards classified as a liability. The Company considered the impact on diluted earnings as if the award was settled in cash or in shares. These awards had a 87,879 share impact on dilutive weighted average shares for the three months ended March 31, 2020.
As of September 30, 2017 (Successor),March 31, 2020, there were 43,580 shares of ourthe Company's common stock contingently issuable upon the settlement of a vested phantom unit award granted under our 2016 Equity Plan (as defined below) and 13,157 shares of ourits common stock contingently issuable upon the settlement of a vested restricted stock unit award under ourthe 2017 Equity Incentive Plan (the "2017 Equity Plan").Plan. The settlement date for these awards is the earlier of a change in control as described in ourthe 2016 Equity Plan andor 2017 Equity Plan, as applicable, or five years from the grant date. These awards are vested and, as such, have been included in the weighted-averageweighted average shares used to compute basic and diluted net income per share.
2016 Equity Plan
As of September 30, 2017 (Successor),March 31, 2020, there were 17,582 shares of common73,429 restricted stock issuedunit awards granted under our 2017the Company's 2016 Equity Incentive Plan (the "2016 Equity Plan") to certain directors and employees.
On March 31, 2017 (Successor), our board of managers declared a cash distribution of $3.56 per share, totaling $190.0 million,employees, for which was paid on March 31, 2017 to holders of our Class A Units, Class B Units and Class C Units of record as of March 27, 2017.
On May 17, 2017, the board of directors of the Company (the "Board") adopted a policy (the "Dividend Policy") of paying a quarterly cash dividend of $0.05 per share. The initial quarterly dividend of $2.7 million was paid on June 13, 2017 to stockholders of record on May 30, 2017. The Dividend Policy also states the following: In addition to the regular quarterly dividend and to the extent that the Company generates excess cash that is beyond the then current requirements of the business, the Board may consider returning all or a portion of such excess cash to stockholders through a special dividend or implementation of a stock repurchase program. Any future dividends or stock repurchases will be at the discretion of the Board and subject to consideration of a number of factors, including business and marketservice-based vesting conditions future financial performance and other strategic investment opportunities. The Company will also seek to optimize its capital structure to improve returns to stockholders while allowing flexibility for the Company to pursue very selective strategic growth opportunities that can provide compelling stockholder returns.
On July 31, 2017, the Board declared a regular quarterly cash dividend of $0.05 per share, totaling $2.7 million, which was paid on August 23, 2017, to stockholders of recordthese awards were not met as of the close of businessmeasurement date. As such, these awards were excluded from basic earnings per share. These awards had a 55,329 share impact on August 14, 2017.dilutive weighted average shares for the three months ended March 31, 2020.
Note 8—9—Related Party Transactions
In connection with the Asset Acquisition, theThe Company acquiredowns a 50% interest in Black Warrior Methane (“BWM”) and Black Warrior Transmission (“BWT”), which are accounted for under the proportionate consolidation method and equity method, respectively. The Company has granted the rights to produce and sell methane gas from its coal mines to BWM and BWT. The Company’s net investments in, advances to/from BWT and equity in earnings or loss of BWT are not material to the
WARRIOR MET COAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)
NINE MONTHS ENDED SEPTEMBER 30, 2017 (UNAUDITED)
Company. The Company supplied labor to BWM and incurred costs, including property and liability insurance, to support the joint venture. The Company charged the joint venture for such costs on a monthly basis, which were $1.3 million andtotaled $0.5 million for the three and nine months ended September 30, 2017 (Successor), respectively, $1.3 million and $0.9 million for the three and six months ended September 30, 2016 (Successor), respectively, and $0.3 million for the three months ended March 31, 2016 (Predecessor).
The Predecessor also received revenue from coal sales to affiliates of the Parent that were not acquired in connection with the Asset Acquisition. The Predecessor recognized revenue from these affiliates of $1.42020 and $0.1 million, for the three months ended March 31, 2016 (Predecessor).2019.
Note 9—10—Commitments and Contingencies
Environmental Matters
The Company is subject to a wide variety of laws and regulations concerning the protection of the environment, both with respect to the construction and operation of its plants, mines and other facilities and with respect to remediating environmental conditions that may exist at its own and other properties.
The Company believes that it is in substantial compliance with federal, state and local environmental laws and regulations. The Company accrues for environmental expenses resulting from existing conditions that relate to past operations when the costs are probable and can be reasonably estimated. As of September 30, 2017 (Successor)March 31, 2020 and December 31, 2016 (Successor),2019, there were no accruals for environmental matters other than asset retirement obligations for mine reclamation.
WARRIOR MET COAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)
THREE MONTHS ENDED MARCH 31, 2020 (UNAUDITED)
Miscellaneous Litigation
From time to time, the Company is party to a number of lawsuits arising in the ordinary course of their businesses. The Company records costs relating to these matters when a loss is probable and the amount can be reasonably estimated. The effect of the outcome of these matters on the Company’s future results of operations cannot be predicted with certainty as any such effect depends on future results of operations and the amount and timing of the resolution of such matters. As of September 30, 2017 (Successor)March 31, 2020 and December 31, 2016 (Successor),2019, there were no items accrued for miscellaneous litigation.
Indemnifications
Walter Canada Settlement Proceeds
On July 15, 2015, Walter Energy and certain of its wholly owned U.S. subsidiaries, including Jim Walter Resources, Inc. (“JWR”) filed voluntary petitions for relief under Chapter 11 of Title 11 of the U.S. Bankruptcy Code (the “Chapter 11 Cases”) in the Northern District of Alabama, Southern Division. On December 7, 2015, Walter Energy Canada Holdings, Inc., Walter Canadian Coal Partnership and their Canadian affiliates (collectively “Walter Canada”) applied for and were granted protection under the Companies’ Creditors Arrangement Act (the “CCAA”) pursuant to an Initial Order of the Supreme Court of British Columbia.
In connection with the ordinary courseCompany’s acquisition of business,certain core operating assets of Walter Energy, the Company entered intoacquired a contractual arrangement under whichreceivable owed to Walter Energy by Walter Canada for certain shared services provided by Walter Energy to Walter Canada (the “Shared Services Claim”) and a receivable for unpaid interest owed to Walter Energy from Walter Canada in respect of a promissory note (the “Hybrid Debt Claim”). Each of these claims were asserted by the Company has agreed to indemnify a third party to such arrangement from any losses arising from certain events as specified in the particular contracts, which may include,Walter Canada CCAA proceedings. Walter Energy deemed these receivables to be impaired for example, litigation or claims relating to past performance. The Company had accrued $0.3 million as of September 30, 2017 (Successor) andthe year ended December 31, 2016 (Successor),2015 and the Company did not assign any value to these receivables in acquisition accounting as collectability was deemed remote. In March 2020, the Company received approximately $1.8 million in settlement proceeds for the Shared Services Claim and Hybrid Debt Claim which is includedreflected as other income in other long-term liabilities.the Condensed Statement of Operations. These settlement proceeds are in addition to the $22.8 million received in 2019. The remaining maximum exposure under this arrangement is $0.2 million.collectability of additional amounts, if any, related to the Shared Services Claim and Hybrid Debt Claim depends on the outcome of, and the timing of any resolutions of, the Walter Canada CCAA proceedings and cannot be predicted with certainty.
Commitments and Contingencies—Other
The Company is party to various transportation and throughput agreements with rail and barge transportation providers and the Alabama State Port Authority. These agreements contain annual minimum tonnage guarantees with respect to coal transported from the mine sites to the Port of Mobile, Alabama, the unloading of rail cars or barges, and the loading of vessels. If the Company does not meet its minimum throughput obligations, which are based on annual minimum amounts, it is required to pay the transportation providers or the Alabama State Port Authority a contractually specified amount per metric ton for the difference between the actual throughput and the minimum throughput requirement. At September 30, 2017 (Successor),March 31, 2020 and December 31, 2019, the Company had no0 liability recorded for minimum throughput requirements. At December 31, 2016 (Successor), the Company had accrued a liability of $2.1 million as a result of not meeting the required minimums, which is included in accrued expenses on the Condensed Balance Sheet.
Royalty and Lease Obligations
The Company’s leases are primarily for mining equipment and automobiles. At September 30, 2017 (Successor) and December 31, 2016 (Successor), the Company had no future minimum payments due under non-cancellable operating leases.
WARRIOR MET COAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)
NINE MONTHS ENDED SEPTEMBER 30, 2017 (UNAUDITED)
A substantial amount of the coal that the Company mines is produced from mineral reserves leased from third-party land owners. These leases convey mining rights to the Company in exchange for royalties to be paid to the land owner as either a fixed amount per ton or as a percentage of the sales price. Although coal leases have varying renewal terms and conditions, they generally last for the economic life of the reserves. Coal royalty expense was $22.3 million and $74.5 million, for the three and nine months ended September 30, 2017 (Successor), respectively, $2.7 million and $6.7 million for the three and six months ended September 30, 2016 (Successor), respectively, and $3.6$14.2 million for the three months ended March 31, 2016 (Predecessor).2020 and $26.7 million for the three months ended March 31, 2019.
Note 10—11—Stockholders' Equity
Pursuant to the Company's certificate of incorporation, the Company is authorized to issue up to 140,000,000 shares of common stock $0.01, par value per share and 10,000,000 shares of preferred stock $0.01 par value per share. As of September 30, 2017, there were 53,446,284 shares of common stock issued and outstanding.
Stock Repurchase Program
On March 31, 2017,26, 2019, the board of managers declared a cash distribution payable to holders of our then outstanding Class A Units, Class B Units and Class C Units as of March 27, 2017, resulting in distributions to such holders in the aggregate amount of $190.0 million (the “Special Distribution”). In connection with the conversion of Warrior Met Coal, LLC into Warrior Met Coal, Inc., the Class C Units, which were issued pursuant to the 2016 Equity Plan, were converted into restricted shares (the "Restricted Shares") of common stock of the Company, par value $0.01 per share, and the Special Distribution with respect to such Restricted Shares was not paid but held in trust pending their vesting. As of September 30, 2017 (Successor), approximately $3.1 million is held in the trust and is included within other long term assets in the accompanying Condensed Balance Sheets.
On June 1, 2017, the Compensation Committee (the "Committee") of theCompany's board of directors (the "Board") approved the modification described belowCompany's second stock repurchase program (the “Modification”“Stock Repurchase Program”) that authorizes repurchases of up to the award agreements (the “Awards”) for the Restricted Shares to certain officers, directors and employeesan aggregate of the Company. Pursuant to the Modification, the Committee waived certain vesting requirements with respect to the Special Distribution for the Restricted Shares such that funds currently held in trust as described above with respect to the Special Distribution will vest immediately for recipients that received less than $100.0 thousand and for recipients that received greater than $100.0 thousand, 50% of the Restricted Shares vest immediately. However, funds held in trust with respect to the Special Distribution for the remaining 50% of the Restricted Shares will not be released until such shares vest pursuant to the original terms of the Awards on the basis of the passage of time and the Company’s achievement of certain metrics.
In addition and pursuant to the Modification, the holders of the Restricted Shares were permitted to elect to receive the 2017 Dividend released from trust as described above with respect to their Restricted Shares (i) 100% in cash; (ii) 50% in cash and 50% in restricted stock units (“RSUs”); or (iii) 100% in RSUs.
In connection with the Modification, the Committee approved a form of Restricted Stock Unit Award Agreement (the “RSU Award Agreement”) pursuant to the 2017 Equity Plan on June 1, 2017 (the “Grant Date”) for those Holders who elected to receive the Special Distribution, in whole or in part, in RSUs (the “Participants”). The RSU Award Agreement provides that RSUs awarded pursuant to the Modification shall be fully vested on the Grant Date and shall be settled in shares of Common Stock on a one-for-one basis on the earliest of (i) one-third on each of the first three anniversaries of the Grant Date; (ii) a Change in Control (as defined in the Plan); (iii) the Participant’s separation from service with the Company or its affiliates; or (iv) death of the Participant.
In connection with the Modification, for the nine months ended September 30, 2017(Successor), the Company recognized a reduction to dividends payable of $0.2 million associated with the holders that elected to receive cash and $1.3 million was treated as an adjustment to equity for those that elected RSUs. Also, due to the Company's IPO, the Company recognized approximately $0.6$70.0 million of stock compensation expense for awards granted under the 2016 Equity Plan for the nine months ended September 30, 2017.
For the nine months ended September 30, 2017 (Successor), the Company also recognized approximately $0.5 million of compensation expense for awards granted under the 2017 Equity Plan.
WARRIOR MET COAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)
NINETHREE MONTHS ENDED SEPTEMBER 30, 2017MARCH 31, 2020 (UNAUDITED)
Note 11—Derivative Instruments
Company's outstanding common stock. The Company enters into natural gas swap contractsfully exhausted its previous stock repurchase program of $40.0 million of its outstanding common stock. The Stock Repurchase Program does not require the Company to hedgerepurchase a specific number of shares or have an expiration date. The Stock Repurchase Program may be suspended or discontinued by the exposureBoard at any time without prior notice.
Under the Stock Repurchase Program, the Company may repurchase shares of its common stock from time to variabilitytime, in expected future cash flows associatedamounts, at prices and at such times as the Company deems appropriate, subject to market and industry conditions, share price, regulatory requirements as determined from time to time by the Company and other considerations. The Company’s repurchases may be executed using open market purchases or privately negotiated transactions in accordance with applicable securities laws and regulations, including Rule 10b-18 of the fluctuationsExchange Act and repurchases may be executed pursuant to Rule 10b5-1 under the Exchange Act. Repurchases will be subject to limitations in the priceABL Facility and the Indenture. The Company intends to fund repurchases under the Stock Repurchase Program from cash on hand and/or other sources of natural gas related to the Company’s forecasted sales. liquidity.
As of September 30, 2017 (Successor),March 31, 2020, the Company had natural gas swap contracts outstanding with notional amounts totaling 1,980has repurchased 500,000 shares for approximately $10.6 million, British thermal units maturing inleaving approximately $58.8 million of share repurchases authorized under the fourth quarterStock Repurchase Program.
In light of 2017the uncertainties resulting from the novel coronavirus disease 2019 ("COVID-19") and 2,400 million maturing in the fourth quarter of 2018. As of December 31, 2016 (Successor),as a precautionary measure to preserve liquidity, the Company had natural gas swap contracts outstanding with notional amounts totaling 7,920 million British thermal units maturing in the fourth quarter of 2017.
The Company’s natural gas swap contracts economically hedge certain risk but are not designated as hedges for financial reporting purposes. All changes in the fair value of these derivative instruments are recorded as other revenues in the Condensed Statements of Operations.is temporarily suspending its share repurchase program. The Company records all derivative instruments at fair valuewill continue to monitor its liquidity in light of the COVID-19 pandemic and had an assetwill consider when to reinstate the program.
Regular Quarterly Dividend
On February 14, 2020, the Board declared a regular quarterly cash dividend of $0.3$0.05 per share, totaling $2.6 million, relatedwhich was paid on March 2, 2020, to natural gas swap contracts outstandingstockholders of record as of September 30, 2017 (Successor),the close of which $0.25 million was included in prepaid expenses and $0.05 million was included in other long-term assets, and $3.8 million as of December 31, 2016 (Successor) included in other current liabilities in the accompanying Condensed Balance Sheets.business on February 25, 2020.
Note 12—Fair Value of Financial Instruments
The following table presents information about the Company’s financial liabilities measured at fair value on a recurring basis and indicate the level of the fair value hierarchy utilized to determine such fair values (in thousands):
|
| | | | | | | | | | | | | | | | |
| | Successor |
| | Fair Value Measurements as of September 30, 2017 Using: |
| | Level 1 | | Level 2 | | Level 3 | | Total |
Assets: | | | | | | | | |
Natural gas swap contracts | | $ | — |
| | $ | 288 |
| | $ | — |
| | $ | 288 |
|
|
| | | | | | | | | | | | | | | | |
| | Successor |
|
| Fair Value Measurements as of December 31, 2016 Using: |
|
| Level 1 |
| Level 2 |
| Level 3 |
| Total |
Liabilities: |
|
|
|
|
|
|
|
|
Natural gas swap contracts |
| $ | — |
|
| $ | 3,784 |
|
| $ | — |
|
| $ | 3,784 |
|
The Company hashad no assets or any other liabilities measured at fair value on a recurring basis as of September 30, 2017 (Successor)March 31, 2020 or December 31, 2016 (Successor). During the three and nine months ended September 30, 2017 (Successor), there were no transfers between Level 1, Level 2 and Level 3. The Company uses quoted dealer prices for similar contracts in active over-the-counter markets for determining fair value of Level 2 liabilities. There were no changes to the valuation techniques used to measure liability fair values on a recurring basis during the three and nine months ended September 30, 2017 (Successor).2019.
The following methods and assumptions were used to estimate the fair value for which the fair value option was not elected:
Cash and cash equivalents, short-term investments, restricted cash, receivables and trade accounts payable—The carrying amounts reported in the Condensed Balance SheetSheets approximate fair value due to the short-term nature of these assets and liabilities.
Debt—The Company's outstanding promissory notedebt is carried at cost. As of March 31, 2020, the Company had $70.0 million outstanding under the ABL Facility, with $46.1 million available, net of outstanding letters of credit of $8.9 million. There were 0 borrowings outstanding under the ABL Facility and there were $8.9 million of letters of credit issued and outstanding under the ABL Facility as of December 31, 2019. As of March 31, 2020, the estimated fair value of the Notes is approximately $291.1 million based upon observable market data (Level 2) and the carrying amount of the ABL Facility approximates fair value.
WARRIOR MET COAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)
NINE MONTHS ENDED SEPTEMBER 30, 2017 (UNAUDITED)
Note 13—Reorganization Items, Net
Expenses and income directly associated with the Chapter 11 Cases are reported separately in the Condensed Statements of Operations as reorganization items as required by ASC 852. Reorganization items also include adjustments to reflect the carrying value of liabilities subject to compromise at their estimated allowed claim amounts, as such adjustments are determined.
Reorganization items include an allocation of professional fees incurred in relation to the Chapter 11 Cases. For the three months ended March 31, 2016 (Predecessor), the cost of these professional fees was allocated on the basis of the Predecessor’s assets as compared to the total assets of the Parent for each reporting period.
The following table presents reorganization items (in thousands):
|
| | | |
| Predecessor |
| For the three months ended March 31, 2016 |
Professional fees | (10,962 | ) |
Rejected executory contracts, leases and other | 18,882 |
|
Reorganization items, net | $ | 7,920 |
|
Net cash paid for reorganization items for the three months ended March 31, 2016 (Predecessor) totaled approximately $12.3 million.
Note 14—Restructuring Costs
For the three months ended March 31, 2016 (Predecessor), the Predecessor recognized restructuring charges of approximately $3.4 million due to workforce reductions at the Alabama No. 7 underground mine, the Alabama No. 4 underground mine and corporate headquarters in conjunction with cost containment initiatives implemented in response to the deterioration in the metallurgical coal market. The restructuring charges consist primarily of severance and related benefits costs. The Company does not expect to incur any additional restructuring charges in the Successor periods in connection with the Predecessor restructuring actions.
Note 15—13—Segment Information
The Company identifies a business as an operating segment if: i)(i) it engages in business activities from which it may earn revenues and incur expenses; ii)(ii) its operating results are regularly reviewed by the Chief Operating Decision Maker (“CODM”), who is the Company’s Chief Executive Officer, to make decisions about resources to be allocated to the segment and assess its performance; and iii)(iii) it has available discrete financial information. The Company has determined that its two2 underground mining operations are its operating segments. The CODM reviews financial information at the operating segment level to allocate resources and to assess the operating results and financial performance for each operating segment. Operating segments are aggregated into a reportable segment if the operating segments have similar quantitative economic characteristics and if the operating segments are similar in the following qualitative characteristics: i)(i) nature of products and services; ii)(ii) nature of production processes; iii)(iii) type or class of customer for their products and services; iv)(iv) methods used to distribute the products or provide services; and v)(v) if applicable, the nature of the regulatory environment.
WARRIOR MET COAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)
THREE MONTHS ENDED MARCH 31, 2020 (UNAUDITED)
The Company has determined that the two2 operating segments are similar in both quantitative and qualitative characteristics and thus the two2 operating segments have been aggregated into one1 reportable segment. The Company has determined that its natural gas and royalty businesses did not meet the criteria in ASC 280 to be considered as operating or reportable segments. Therefore, the Company has included their results in an “all other” category as a reconciling item to consolidated amounts.
WARRIOR MET COAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)
NINE MONTHS ENDED SEPTEMBER 30, 2017 (UNAUDITED)
The Company does not allocate all of its assets, or its depreciation and depletion expense, selling, general and administrative expenses, other post-retirement benefits, transactions costs, restructuring costs, interest expense, reorganization items, net and income tax expense by segment.
The following tables include reconciliations of segment information to consolidated amounts (in thousands):
|
| | | | | | | |
| For the three months ended March 31, |
| 2020 | | 2019 |
Revenues | | | |
Mining | $ | 221,338 |
| | $ | 369,681 |
|
All other | 5,382 |
| | 8,609 |
|
Total revenues | $ | 226,720 |
| | $ | 378,290 |
|
|
| | | | | | | | | | | | | | | | | | | | |
| Successor | | | | | Predecessor |
| For the three months ended September 30, | | For the nine months ended September 30, | | For the six months ended September 30, | | | For the three months ended March 31, |
| 2017 | | 2016 | | 2017 | | 2016 | | | 2016 |
Revenues | | | | | | | | | | |
Mining | $ | 302,958 |
| | $ | 44,395 |
| | $ | 895,802 |
| | $ | 129,810 |
| | | $ | 65,154 |
|
All other | 8,997 |
| | 8,496 |
| | 33,487 |
| | 14,555 |
| | | 6,229 |
|
Total revenues | $ | 311,955 |
| | $ | 52,891 |
| | $ | 929,289 |
| | $ | 144,365 |
| | | $ | 71,383 |
|
|
| | | | | | |
| For the three months ended March 31, |
| 2020 | | 2019 |
Capital Expenditures | | | |
Mining | 21,837 |
| | $ | 23,210 |
|
All other | 938 |
| | 1,185 |
|
Total capital expenditures | 22,775 |
| | $ | 24,395 |
|
|
| | | | | | | | | | | | | | | | | | | |
| Successor | | | | | Predecessor |
| For the three months ended September 30, | | For the nine months ended September 30, | | For the six months ended September 30, | | | For the three months ended March 31, |
| 2017 | | 2016 | | 2017 | | 2016 | | | 2016 |
Capital Expenditures | | | | | | | | | | |
Mining | 34,125 |
| | $ | 2,081 |
| | $ | 60,647 |
| | $ | 7,424 |
| | | $ | 4,588 |
|
All other | 283 |
| | 354 |
| | 2,024 |
| | 1,025 |
| | | 834 |
|
Total capital expenditures | 34,408 |
| | $ | 2,435 |
| | $ | 62,671 |
| | $ | 8,449 |
| | | $ | 5,422 |
|
The Company evaluates the performance of its segment based on Segment Adjusted EBITDA, which is defined as net income (loss) adjusted for other revenues, cost of other revenues, depreciation and depletion, selling, general and administrative, net interest expense, income tax expense, loss on early extinguishment of debt, other postretirement benefits,income and certain transactions or adjustments that the CODM does not consider for the purposes of making decisions to allocate resources among segments or assessing segment performance. Segment Adjusted EBITDA does not represent and should not be considered as an alternative to cost of sales under GAAP and may not be comparable to other similarly titled measures used by other companies. Below is a reconciliation of Segment Adjusted EBITDA to net income, (loss), which is its most directly comparable financial measure calculated and presented in accordance with GAAP (in thousands):
WARRIOR MET COAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)
NINETHREE MONTHS ENDED SEPTEMBER 30, 2017MARCH 31, 2020 (UNAUDITED)
|
| | | | | | | |
| For the three months ended March 31, |
| 2020 | | 2019 |
Segment Adjusted EBITDA | $ | 69,824 |
| | $ | 187,053 |
|
Other revenues | 5,382 |
| | 8,609 |
|
Cost of other revenues | (7,561 | ) | | (7,745 | ) |
Depreciation and depletion | (28,692 | ) | | (22,233 | ) |
Selling, general and administrative | (8,456 | ) | | (8,905 | ) |
Loss on early extinguishment of debt | — |
| | (9,756 | ) |
Other income | 1,822 |
| | — |
|
Interest expense, net | (7,533 | ) | | (8,592 | ) |
Income tax expense | (3,241 | ) | | (27,984 | ) |
Net income | $ | 21,545 |
| | $ | 110,447 |
|
|
| | | | | | | | | | | | | | | | | | | | |
| Successor | | | | | Predecessor |
| For the three months ended September 30, | | For the nine months ended September 30, | | For the six months ended September 30, | | | For the three months ended March 31, |
| 2017 | | 2016 | | 2017 | | 2016 | | | 2016 |
Segment Adjusted EBITDA | $ | 113,394 |
| | $ | (7,392 | ) | | $ | 439,942 |
|
| $ | (25,843 | ) | |
| $ | (7,143 | ) |
Other revenues | 8,997 |
| | 8,496 |
| | 33,487 |
| | 14,555 |
| | | 6,229 |
|
Cost of other revenues | (6,985 | ) | | (6,998 | ) | | (22,959 | ) | | (12,124 | ) | | | (4,698 | ) |
Depreciation and depletion | (23,393 | ) | | (22,538 | ) | | (57,625 | ) | | (38,359 | ) | | | (28,958 | ) |
Selling, general and administrative | (9,243 | ) | | (4,516 | ) | | (23,073 | ) | | (10,331 | ) | | | (9,008 | ) |
Other postretirement benefits | — |
| | — |
| | — |
| | — |
| | | (6,160 | ) |
Restructuring charges | — |
| | — |
| | — |
| | — |
| | | (3,418 | ) |
Transaction and other costs | — |
| | — |
| | (12,873 | ) | | (10,475 | ) | | | — |
|
Interest expense, net | (640 | ) | | (694 | ) | | (1,890 | ) | | (1,128 | ) | | | (16,562 | ) |
Reorganization items, net | — |
| | — |
| | — |
| | — |
| | | 7,920 |
|
Income tax benefit (expense) | 37,587 |
| | — |
| | 2,881 |
| | — |
| | | (18 | ) |
Net income (loss) | $ | 119,717 |
| | $ | (33,642 | ) | | $ | 357,890 |
| | $ | (83,705 | ) | | | $ | (61,816 | ) |
Note 16—14—Subsequent Events
Amendment to ABL Facility
On October 3, 2017, the Company entered into Amendment No. 4 to the ABL Facility and Amendment No. 2 to the Pledge and Security Agreement dated as of April 1, 2016 (the “Security Agreement”) (the "Fourth Amendment") to, among other things, (i) provide an exception to the indebtedness and lien negative covenants in the ABL Facility to permit the Company to incur indebtedness in an aggregate principal amount not to exceed $500.0 million at any time outstanding, which indebtedness may be unsecured or secured and (ii) to amend certain provisions in the Security Agreement to reflect additional lien and indebtedness capacity granted under the ABL Facility as amended by the Fourth Amendment.
Regular Quarterly Dividend
On October 25, 2017,April 24, 2020, the Board declared a regular quarterly cash dividend of $0.05 per share, totaling $2.7approximately $2.6 million, which will be paid on November 10, 2017,May 11, 2020 to stockholders of record as of the close of business on November 3, 2017.May 5, 2020.
Senior Secured Notes Offering and November Special Dividend
On November 2, 2017, the Company consummated a private offering (the “Offering”) of $350.0 million aggregate principal amount of 8.00% Senior Secured Notes due 2024 (the “Notes”) to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”), and to certain non-U.S. persons in transactions outside the United States in accordance with Regulation S under the Securities Act. The Company will use the net proceeds of approximately $340.0 million from the Offering, together with cash on hand of approximately $260.0 million, to pay a special cash dividend of approximately $600.0 million, or $11.21 per share, to all of its stockholders on a pro rata basis (the "November Special Dividend"). On November 2, 2017, the Board declared the November Special Dividend to be paid on November 22, 2017 to stockholders of record as of the close of business on November 13, 2017.
The Notes will mature on November 1, 2024 and interest is payable on May 1 and November 1 of each year, commencing May 1, 2018. The Notes are fully and unconditionally guaranteed on a joint and several basis by each of the Company's direct and indirect wholly-owned domestic restricted subsidiaries that are guarantors under the ABL Facility (subject to customary release provisions).
WARRIOR MET COAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)
NINE MONTHS ENDED SEPTEMBER 30, 2017 (UNAUDITED)
At any time prior to November 1, 2020, the Company may redeem the Notes, in whole or in part, at a price equal to 100.00% of the principal amount of the Notes redeemed plus the Applicable Premium (as defined in the indenture governing the Notes) and accrued and unpaid interest, if any, to, but excluding, the applicable redemption date. The Notes are redeemable at the Company's option, in whole or in part, from time to time, on or after November 1, 2020, at redemption prices specified in the indenture, plus accrued and unpaid interest, if any, to, but excluding the redemption date. At any time on or prior to November 1, 2020, the Company may redeem up to 40% of the aggregate principal amount of the Notes with the proceeds of certain equity offerings, at a redemption price of 108.00% of the principal amount of the Notes, plus accrued and unpaid interest, if any, to but excluding the redemption date. The Company is also required to make offers to purchase the Notes (i) at a purchase price of 101.00% of the principal amount thereof in the event it experiences specific kinds of change of control triggering events, (ii) at a purchase price of 103.00% of the principal amount thereof prior to making certain restricted payments, and (iii) at a purchase price of 100.00% of the principal amount there of in the event it makes certain asset sales or dispositions and does not reinvest the net proceeds therefrom or use such net proceeds to repay certain indebtedness, in each case, plus accrued and unpaid interest, if any, to, but excluding the date of purchase.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis provides a narrative of our results of operations and financial condition for the three and nine months ended September 30, 2017 (Successor), the three and six months ended September 30, 2016 (Successor) and the three months ended March 31, 2016 (Predecessor).2020 and March 31, 2019. You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and related notes appearing in this Quarterly Report on Form 10-Q and the audited financial statements for the year ended December 31, 20162019 included in the final prospectusour Annual Report on Form 10-K for the Company's initial public offering (“IPO”) dated April 12, 2017 and filed pursuant to Rule 424(b)(4) with the Securities and Exchange Commissionyear ended December 31, 2019 (the “SEC”"2019 Annual Report") on April 14, 2017 (the “IPO Prospectus”), which is part of our registration statement on Form S-1 (File No. 333-216499). Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report,Form 10-Q, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth in the “Risk Factors” section of this Quarterly Report on Form 10-Q, our actual results could differ materially from the results described in, or implied by, the forward-looking statements contained in the following discussion and analysis. Please see “Forward-Looking Statements.”
Overview
We are a large scale, low cost U.S.-based, environmentally and socially minded supplier to the global steel industry. We are dedicated
entirely to mining non-thermal met coal used as a critical component of steel production by metal manufacturers in Europe,
South America and Asia. We are a large-scale, low-cost producer and exporter of premium met coal, also known as hard
coking coal (“HCC”), operating two highly productivehighly-efficient longwall operations in our underground mines based in Alabama.Alabama, Mine No. 4
and Mine No. 7.
As of December 31, 2016 (Successor)2019, based on a reserve report prepared by Marshall Miller & Associates, Inc. ("Marshall Miller"), Mine No. 4 and Mine No. 7, our two operating mines, had approximately 107.8105.3 million metric tons of recoverable reserves and, based on a reserve report prepared by Stantec Consulting Services, Inc. ("Stantec") our undeveloped Blue Creek Energy Minemine contained 103.0 million metric tons of recoverable reserves. The hard cokingAs a result of our high quality coal, (“HCC”our realized price has historically been in line with, or at a slight discount to, the Platts Premium Low Volatility ("LV") we produce is of a similar quality to coal once referred to as the “benchmark HCC” produced inFree On Board ("FOB") Australia which was used to set quarterly pricing for the met coal industry.Index Price ("Platts Index"). Our HCC, mined from the Southern Appalachian portion of the Blue Creek coal seam, is characterized by low sulfur, low-to-medium ash, and low-to-medium volatility.LV to mid-volatility ("MV"). These qualities make our coal ideally suited as a coking coal for the manufacture of steel.
We sell substantially all of our met coal production to steel producers. Met coal, which is converted to coke, is a critical input in the steel production process. Met coal is both consumed domestically in the countries where it is produced and exported by several of the largest producing countries, such as China, Australia, the United States, Canada and Russia. Therefore, demand for our coal will be highly correlated to conditions in the global steelmaking industry. The steelmaking industry’s demand for met coal is affected by a number of factors, including the cyclical nature of that industry’s business, technological developments in the steelmaking process and the availability of substitutes for steel such as aluminum, composites and plastics. A significant reduction in the demand for steel products would reduce the demand for met coal, which would have a material adverse effect upon our business. Similarly, if alternative ingredients are used in substitution for met coal in the integrated steel mill process, the demand for met coal would materially decrease, which could also materially adversely affect demand for our met coal.
Industry Overview
The industry benchmark price was replaced inglobal steelmaking industry's demand for met coal is also affected by pandemics, epidemics or other public health emergencies, such as the second quarter by a new average index pricing methodology, which varies by supplier, but was based on the averagerecent outbreak of the Platts premium low-volatilenovel coronavirus disease 2019 ("low-vol"COVID-19"), which has spread from China to many other countries including the United States. In March 2020, the World Health Organization ("WHO") index.declared COVID-19 as a pandemic, and the President of the United States declared the COVID-19 outbreak a national emergency. The Steel Index ("TSI") premium coking coal indexoutbreak has resulted in governments around the world implementing increasingly stringent measures to help control the spread of the virus, including quarantines, "shelter in place" and "stay at home" orders, travel restrictions, business curtailments, school closures, and other measures. In addition, governments and central banks in some instances,several parts of the Argus Indexworld have enacted fiscal and monetary stimulus measures to counteract the impacts of COVID-19.
We are a company operating in a critical infrastructure industry, as defined by the U.S. Department of Homeland Security. As such, we continue to operate our mines in a safe manner under the guidelines issued by the Centers for Disease Control and Prevention and Alabama State Health Department. This includes, among other things, eliminating business travel, staggering manbuses, cage and shift start times to allow for social distancing, enhanced disinfectant cleaning at all locations, maintaining antibacterial supplies at all locations, providing employees with masks, gloves and other gear, eliminating visitors or vendors on property without strict screening process and testing the temperature of all employees.
Notwithstanding our continued operations, COVID-19 has begun to have and may continue to have further negative impacts on our two operating mines, supply chain, transportation networks and customers, which may compress our margins,
and reduce demand for the monthsmet coal that we produce, including as a result of June, Julypreventative and August. For our traditional benchmark customers,precautionary measures that we, used an average of the Platts premium low-volother businesses and the TSI premium coking coal index which resulted in a third quarter benchmark index price of approximately $170.34 per metric ton. Thisgovernments are taking. The COVID-19 outbreak is a decreasewidespread public health crisis that is adversely affecting the economies and financial markets of approximately $24.66many countries, including those of our customers, which are primarily located in Europe, South America and Asia. Any resulting economic downturn could adversely affect demand for our met coal and contribute to volatile supply and demand conditions affecting prices and volumes. The progression of COVID-19 could also negatively impact our business or 13% from the second quarter of 2017 price of $194.00 and a decrease of approximately $155.66 or 41% from the first quarter of 2017 price of $285.00 per metric ton. We expect that our new index pricing formula for each quarter will be the average prices of the Platts premium low-vol and TSI premium coking coal index on a one month lag basis. It is likely that this method will be adjusted in the future.
Basis of Presentation
Our results on a “Predecessor” basis relate to the assets acquired and liabilities assumed by Warrior Met Coal, LLC from Walter Energy in the Asset Acquisition and the related periods ending on or prior to March 31, 2016. Our results on a “Successor” basis relate to Warrior Met Coal, LLC and its subsidiaries for periods beginning as of April 1, 2016 and Warrior Met Coal, Inc. after giving effect to our corporate conversion on April 12, 2017 from a Delaware limited liability company into a Delaware corporation, which we refer to as the “corporate conversion.” Our results have been separated by a vertical line to
identify these different bases of accounting.
The historical costs and expenses reflected in the Predecessor combined results of operations include an allocation for certain corporate functions historically providedthrough the temporary closure of one of our mines, customers or critical suppliers, or the McDuffie Coal Terminal at the Port of Mobile, Alabama, or a disruption to our rail and barge carriers, which would delay or prevent deliveries to our customers, among others.
In addition, the ability of our employees and our suppliers' and customers' employees to work may be significantly impacted by Walter Energy. Substantially allindividuals contracting or being exposed to COVID-19, or as a result of the Predecessor’s senior management were employedcontrol measures noted above, which may significantly affect the demand for met coal. Our customers may be directly impacted by Walter Energybusiness curtailments or weak market conditions and certain functions critical to the Predecessor’s operations were centralized and managed by Walter Energy. Historically, the centralized functions have included executive senior management, financial reporting, financial planning and analysis, accounting, shared services, information technology, tax, risk management, treasury, legal, human resources, and strategy and development. The costs of each of these services has been allocated to the Predecessor on the basis of the Predecessor’s relative headcount, revenue and total assets to that of Walter Energy.
The condensed combined financial statements of our Predecessor included elsewhere in this Form 10-Q and discussed in this discussion and analysis may not be indicativewilling or able to fulfill their contractual obligations or open letters of whatcredit. We may also experience delays in obtaining letters of credit or processing letter of credit payments due to the impacts of COVID-19 on foreign issuing and U.S. intermediary banks. Furthermore, the progression of, and global response to, the COVID-19 outbreak has begun to cause, and increases the risk of, further delays in construction activities and equipment deliveries related to our financial condition, resultscapital projects, including potential delays in obtaining permits from government agencies. The extent of such delays and other effects of COVID-19 on our capital projects, certain of which are outside of our control, is unknown, but they may impact or delay the timing of anticipated benefits of capital projects.
In light of the uncertainties regarding the duration of the COVID-19 pandemic and its overall impact on the Company, its operations and the global economy, we are withdrawing our full-year 2020 guidance issued on February 19, 2020 at this time. We are also appropriately adjusting our operational needs, including managing our expenses, capital expenditures, working capital, liquidity and cash flows. In addition, as a precautionary measure, we borrowed $70.0 million under the ABL Facility on March 24, 2020 ( the "ABL Draw") in order to increase the Company's cash position and preserve financial flexibility. We intend on retaining the funds in cash to preserve liquidity amid the growing uncertainty surrounding the COVID-19 outbreak. We also delayed the budgeted $25.0 million development of Blue Creek until at least July 1, 2020 and temporarily suspended our Stock Repurchase Program. Our financial approach continues to focus on cash flow management and protecting the balance sheet in order to strategically move through this period of uncertainty and mitigate potential long-term impacts to the business (see Liquidity and Capital Resources below).
On March 27, 2020, the President of the United States signed and enacted into law the Coronavirus Aid, Relief and Economic Security Act (the "CARES Act"). The CARES Act, among other things, provides temporary relief from certain aspects of the Tax Cuts and Jobs Act of 2017 that had imposed limitations on the utilization of certain losses, interest expense deductions and alternative minimum tax ("AMT") credits. The CARES Act also provides opportunities for businesses to improve their cash flows would actually have been had we been a separate stand-alone entity, nor are they indicative of what our financial position, results of operationsby obtaining refunds for prior taxable years and cash flows may be inreducing their income and deferring payroll tax liabilities for the future.
Factors Affecting the Comparability of our Financial Statements
Asset Acquisition
On March 31, 2016, we consummated the acquisitioncurrent taxable year. Specifically, Section 2305 of the Predecessor onCARES Act accelerates the ability to receive refunds of remaining AMT credits for tax years 2019, 2020 and 2021. As a debt free basis with minimum legacy liabilities. The Asset Acquisition included Mine No. 4 and Mine No. 7, which management believesresult, we recorded an adjustment of approximately $11.3 million to be tworeclassify AMT credits from a non-current income tax receivable to a current income tax receivable as we now expect to receive these refunds this year. We now expect to receive approximately $24.3 million in 2020 for refunds of AMT credits. We are continuing to evaluate the impact of the highest qualityCARES Act on our business, financial results and lowest cost met coal mines in the United States. Prior to the Asset Acquisition, the Company had no operations and nominal assets. We acquired the Predecessor for an aggregate cash consideration of $50.8 million and the release of claims associated with the 2011 Credit Agreement and Walter Energy’s 9.50% Senior Secured Notes due 2019. In connection with the closing of the Asset Acquisition and in exchange for a portion of the outstanding first lien debt, Walter Energy’s First Lien Lenders were entitled to receive, on a pro rata basis, a distribution of our Class A Units. We accounted for the Asset Acquisition as a business combination under Accounting Standard Codification (“ASC”) Topic 805, Business Combinations.
Corporate Conversion and Initial Public Offering
On April 12, 2017, in connection with the IPO, Warrior Met Coal, LLC filed a certificate of conversion, whereby Warrior Met Coal, LLC effected a corporate conversion from a Delaware limited liability company to a Delaware corporation and changed its name to Warrior Met Coal, Inc. As part of the corporate conversion, holders of Class A, Class B Units (which included the Class B Units which had converted into Class A Units) and Class C Units of Warrior Met Coal, LLC received shares of our common stock for each unit held immediately prior to the corporate conversion using an approximate 13.9459-to-one conversion ratio. In connection with this corporate conversion, the Company filed a certificate of incorporation. Pursuant to the Company’s certificate of incorporation, the Company is authorized to issue up to 140,000,000 shares of common stock $0.01 par value per share and 10,000,000 shares of preferred stock $0.01 par value per share. All references in the Management's Discussion and Analysis of Financial Condition to the number of shares and per share amounts of common stock have been retroactively recast to reflect the corporate conversion.
On April 19, 2017, the Company completed its IPO whereby the selling stockholders named in the Registration Statement on Form S-1 sold 16,666,667 shares of common stock at a price to the public of $19.00 per share. The Company did not receive any proceeds from the sale of common stock in the IPO, and will not receive any proceeds from the exercise of the underwriters’ option to purchase additional shares of common stock, if any. All of the net proceeds from the IPO were received by the selling stockholders.
The aggregate net proceeds to the selling stockholders in the IPO were $296.9 million, net of underwriting discounts and commissions of $19.8 million. The Company paid the offering expenses of $15.9 million on behalf of the selling stockholders. Upon the closing of the IPO, 53,442,532 shares of common stock were outstanding. On April 13, 2017, our common stock began trading on the New York Stock Exchange under the ticker symbol "HCC" and on April 19, 2017, we closed our IPO.disclosures.
How We Evaluate Our Operations
Our primary business, the mining and exporting of met coal for the steel industry, is conducted in one business segment: Mining.mining. All other operations and results are reported under the “All Other” category as a reconciling item to consolidated amounts, which includes the business results from our sale of natural gas extracted as a byproduct from our
underground coal mines and royalties from our leased properties. Our natural gas and royalty businesses do not meet the criteria in ASC 280, Segment Reporting, to be considered as operating or reportable segments.
Our management uses a variety of financial and operating metrics to analyze our performance. These metrics are significant factors in assessing our operating results and profitability and include: (i) Segment Adjusted EBITDA;EBITDA (as defined below), a non-GAAP financial measure; (ii) sales volumes and average selling price, which drive coal sales revenue; (iii) cash cost of sales, a non-GAAP financial measure; and (iv) Adjusted EBITDA, a non-GAAP financial measure.
| | | Successor (Unaudited) | | | | | Predecessor | | | | | |
| For the three months ended September 30, | | For the nine months ended September 30, | | For the six months ended September 30, | | | For the three months ended March 31, | For the three months ended March 31, | |
| 2017 | | 2016 | | 2017 | | 2016 | | | 2016 | 2020 | | 2019 | |
(in thousands) |
| | | | | | |
Segment Adjusted EBITDA | $ | 113,394 |
| | $ | (7,392 | ) | | $ | 439,942 |
| | $ | (25,843 | ) | | | $ | (7,143 | ) | $ | 69,824 |
| | $ | 187,053 |
| |
Metric tons sold | 1,908 |
| | 503 |
| | 4,692 |
| | 1,526 |
| | | 777 |
| 1,646 |
| | 1,901 |
| |
Metric tons produced | 1,470 |
| | 525 |
| | 4,665 |
| | 1,353 |
| | | 801 |
| 1,904 |
| | 2,084 |
| |
Gross price realization(1) | | 89 | % | | 98 | % | |
Average selling price per metric ton | $ | 158.78 |
| | $ | 88.26 |
| | $ | 190.92 |
| | $ | 85.07 |
| | | $ | 83.85 |
| $ | 134.47 |
| | $ | 194.47 |
| |
Cash cost of sales per metric ton | $ | 99.10 |
| | $ | 95.45 |
| | $ | 96.85 |
| | $ | 77.10 |
| | | $ | 69.74 |
| $ | 91.55 |
| | $ | 95.71 |
| |
Adjusted EBITDA | $ | 107,336 |
| | $ | (5,843 | ) | | $ | 431,391 |
| | $ | 2,026 |
| | | $ | (9,048 | ) | $ | 61,655 |
| | $ | 181,018 |
| |
our operating performance as compared to the operating performance of other companies in the coal industry, without regard to financing methods, historical cost basis or capital structure;
the viability of acquisitions and other capital expenditure projects and the returns on investment of various investment opportunities.
We evaluate our operations based on the volume of coal we can safely produce and sell in compliance with regulatory standards, and the prices we receive for our coal. Our sales volume and sales prices are largely dependent upon the terms of our annual coal sales contracts, for which prices generally are set on a quarterly basis.daily index averages. The volume of coal we sell is also a function of the pricing environment in the domestic and international met coal markets.markets and the amounts of LV and MV coal that we sell. We evaluate the price we receive for our coal on antwo primary metrics: first, our gross price realization and second, our average net selling price per metric ton.
our operating performance as compared to the operating performance of other companies in the coal industry, without regard to financing methods, historical cost basis or capital structure; and
the viability of acquisitions and other capital expenditure projects and the returns on investment of various investment opportunities.
We believe that this non-GAAP financial measure provides additional insight into our operating performance, and reflects how management analyzes our operating performance and compares that performance against other companies on a consistent basis for purposes of business decision making by excluding the impact of certain items that management does not believe are indicative of our core operating performance. We believe that cash costscost of sales presents a useful measure of our controllable costs and our operational results by including all costs incurred to produce met coal and sell it free-on-boardFOB at the Port of Mobile.Mobile, Alabama. Period-to-period comparisons of cash cost of sales are intended to help management identify and assess additional trends that potentially impacting our Companyimpact us and that may not be shown solely by period-to-period comparisons of cost of sales. Cash cost of sales should not be considered an alternative to cost of sales or any other measure of financial performance or liquidity presented in accordance with GAAP. Cash cost of sales excludes some, but not all, items that affect cost of sales, and our presentation may vary from the presentations of other companies. As a result, cash cost of sales as presented below may not be comparable to similarly titled measures of other companies.
The following table presents a reconciliation of cash cost of sales to total cost of sales, the most directly comparable GAAP financial measure, on a historical basis for each of the periods indicated.