UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the quarterly period ended March 31, 2020
or
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
Commission File Number: 001-38061
Warrior Met Coal, Inc.
(Exact name of registrant as specified in its charter)
| Delaware | 81-0706839 | ||
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||
| 16243 Highway 216 | |||
| Brookwood | Alabama | 35444 | |
| (Address of Principal Executive Offices) | (Zip Code) | ||
(205) 554-6150
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Exchange Act:
| Trading Symbol(s) | ||
| HCC | ||
| Rights to Purchase Series A Junior Participating Preferred Stock, par value $0.01 per share | -- | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesý No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yesý No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,”“accelerated filer,”“smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ý | Accelerated filer | o | Non-accelerated filer | o | Smaller reporting company | ☐ |
Emerging growth company | ☐ | ||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ýo
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o☐ No ý
Number of shares of common stock outstanding as of November 6, 2017: 53,446,284April 24, 2020: 51,167,697
TABLE OF CONTENTS
| 35 | |||
FORWARD-LOOKING STATEMENTS
This quarterly reportQuarterly Report on Form 10-Q (this "Form 10-Q") includes statements of our expectations, intentions, plans and beliefs that constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and are intended to come within the safe harbor protection provided by those sections. These statements, which involve risks and uncertainties, relate to analyses and other information that are based on forecasts of future results and estimates of amounts not yet determinable and may also relate to our future prospects, developments and business strategies. We have used the words “anticipate,” “approximately,” “assume,” “believe,” “could,” “contemplate,” “continue,” “estimate,” “expect,” “target,” “future,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should” and similar terms and phrases, including in references to assumptions, in this report to identify forward-looking statements. These forward-looking statements are made based on expectations and beliefs concerning future events affecting us and are subject to uncertainties and factors relating to our operations and business environment, all of which are difficult to predict and many of which are beyond our control, that could cause our actual results to differ materially from those matters expressed in or implied by these forward-looking statements. These risks and uncertainties include, but are not limited to:
successful implementation of our business strategies;
the impact of the COVID-19 (as defined below) pandemic, including its impact on our business, employees, suppliers and customers, the met coal and steel industries, and global economic markets;
a substantial or extended decline in pricing or demand for metmetallurgical ("met") coal;
global steel demand and the downstream impact on met coal prices;
inherent difficulties and challenges in the coal mining industry that are beyond our control;
geologic, equipment, permitting, site access, operational risks and new technologies related to mining;
impact of weather and natural disasters on demand and production;
our relationships with, and other conditions affecting, our customers;
unavailability of, or price increases in, the transportation of our met coal;
competition and foreign currency fluctuations;
our ability to comply with covenants in our asset-based revolving credit facility (“ABL Facility”(as amended and restated, the "ABL Facility") and indenture governing the NotesIndenture (as defined below);
our substantial indebtedness and debt service requirements;
significant cost increases and fluctuations, and delay in the delivery of raw materials, mining equipment and purchased components;
work stoppages, negotiation of labor contracts, employee relations and workforce availability;
adequate liquidity and the cost, availability and access to capital and financial markets;
any consequences related to our transfer restrictions under our certificate of incorporation;incorporation and our NOL rights agreement;
our obligations surrounding reclamation and mine closure;
inaccuracies in our estimates of our met coal reserves;
our ability to develop or acquire met coal reserves in an economically feasible manner;
our expectations regarding our future cash tax rate as well as our ability to effectively utilize our net operating loss carry forwards ("NOLs");
challenges to our licenses, permits and other authorizations;
challenges associated with environmental, health and safety laws and regulations;
regulatory requirements associated with federal, state and local regulatory agencies, and such agencies’ authority to order temporary or permanent closure of our mines;
climate change concerns and our operations’ impact on the environment;
failure to obtain or renew surety bonds on acceptable terms, which could affect our ability to secure reclamation and coal lease obligations;
costs associated with our workers’ compensation benefits;
litigation, including claims not yet asserted;
our ability to continue paying our quarterly dividend or pay any special dividend, including dividend;
the November Special Dividendtiming and amount of any stock repurchases we make under our Stock Repurchase Program (as defined below);
terrorist attacks or security threats, including cybersecurity threats;threats.
These forward-looking statements involve a number of risks and uncertainties that could cause actual results to differ materially from those suggested by the forward-looking statements. Forward-looking statements should, therefore, be considered in light of various factors, including those set forth under “Part II, Item 1A. Risk Factors,” “Part I, Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations,” “Part II, Item IA. Risk Factors”Operations” and elsewhere in this Quarterly Report,Form 10-Q, and those set forth from time to time in our other filings with the Securities and Exchange Commission (the “SEC”). These documents are available through our website or through the SEC's Electronic Data Gathering and Analysis Retrieval system at http://www.sec.gov. In light of such risks and uncertainties, we caution you not to place undue reliance on these forward-looking statements.
When considering forward-looking statements made by us in this Quarterly Report on Form 10-Q, (this “Form 10-Q”), or elsewhere, such statements speak only as of the date on which we make them. New risks and uncertainties arise from time to time, and it is impossible for us to predict these events or how they may affect us. We have no duty to, and do not intend to, update or revise the forward-looking statements in this Form 10-Q after the date of this Form 10-Q, except as may be required by law. In light of these risks and uncertainties, you should keep in mind that any forward-looking statement made in this Form 10-Q or elsewhere might not occur.
PART I - FINANCIAL INFORMATION
| 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 | ||||
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
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.
Basis of Presentation
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).
Note 2—Summary of Significant Accounting Policies
Cash and Cash Equivalents and Restricted Cash
| 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.
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)
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)
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
WARRIOR MET COAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)
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)
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 | |
On 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 | |
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)
| 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 | ) | ||
(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
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 | |||
WARRIOR MET COAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)
| 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.
follows (in thousands):
| 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 | ||||
WARRIOR MET COAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)
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 | ) | |||||
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.
Note 8—9—Related Party Transactions
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).
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.
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
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.
WARRIOR MET COAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)
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.
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 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.
| 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 | |
Note 14—Restructuring Costs
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.
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)
| 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
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.
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.
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.
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.
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.
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 | ||||||||||||
(1) For the three months ended March 31, 2020 and 2019, our gross price realization represents a volume weighted-average calculation of our daily realized price per ton based on gross sales, which excludes demurrage and other charges, as a percentage of the Platts Index price.
Segment Adjusted EBITDA
We define Segment Adjusted EBITDA as net income (loss) adjusted for other revenues, cost of other revenues, depreciation and depletion, selling, general and administrative, loss on early extinguishment of debt, other income and certain transactions or adjustments that the CEO,Chief Executive Officer, our Chief Operating Decision Maker, does not consider for the purposes of making decisions to allocate resources among segments or assessing segment performance. Segment Adjusted EBITDA is used as a supplemental financial measure by management and by external users of our financial statements, such as investors, industry analysts, lenders and ratings agencies, to assess:
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 ability of our assets to generate sufficient cash flow to pay distributions;dividends;
our ability to incur and service debt and fund capital expenditures; and
the viability of acquisitions and other capital expenditure projects and the returns on investment of various investment opportunities.
Sales Volumes, Gross Price Realization and Average Net Selling Price
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 gross price realization represents a volume weighted-average calculation of our daily realized price per ton based on the blended gross sales of our LV and MV coal, excluding demurrage and quality specification adjustments, as a percentage of the Platts Index daily price. Our gross price realizations reflect the premiums and discounts we achieve on our LV and MV coal versus the Platts Index price because of the high quality premium products we sell into the export markets. In addition, the premiums and discounts in a quarter or year can be impacted by a rising or falling price environment.
On a quarterly basis, our blended gross selling price per metric ton basis. may differ from the Platts Index price per metric ton, primarily due to our gross sales price per ton being based on a blended average of gross sales price on our LV and MV coals as compared to the Platts Index price due to the fact that many of our met coal supply agreements are based on a variety of indices such as the Platts Index and the Steel Index and due to the timing of shipments.
Our average salesnet selling price per metric ton represents our coal net sales revenue divided by total metric tons of coal sold. In addition, there are certain quality specification adjustments that may occur that would result in a difference between our average realized salesnet selling price per metric ton is net of the previously mentioned demurrage and our average gross realized price.
quality specification adjustments.
Cash Cost of Sales
We evaluate our cash cost of sales on a cost per metric ton basis. Cash cost of sales is based on reported cost of sales and includes items such as freight, royalties, manpower, fuel and other similar production and sales cost items, and may be adjusted for other items that, pursuant to GAAP,accounting principles generally accepted in the United States ("GAAP"), are classified in the Condensed Statements of Operations as costs other than cost of sales, but relate directly to the costs incurred to produce met coal and sell it free-on-boardFOB at the Port of Mobile.Mobile, Alabama. Our cash cost of sales per metric ton is calculated as cash cost of sales divided by the metric tons sold. Cash cost of sales is used as a supplemental financial measure by management and by external users of our financial statements, such as investors, industry analysts, lenders and ratings agencies, to assess:
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.
| 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) | |||||||||||||||||||||||||||
| Cost of sales | $ | 189,564 | $ | 51,787 | $ | 455,860 | $ | 155,653 | $ | 72,297 | $ | 151,514 | $ | 182,628 | |||||||||||||
| Asset retirement obligation accretion | (441 | ) | (714 | ) | (1,324 | ) | (981 | ) | (93 | ) | (369 | ) | (373 | ) | |||||||||||||
| Stock compensation expense | (39 | ) | — | (114 | ) | — | — | (449 | ) | (319 | ) | ||||||||||||||||
Mine No. 4 idle costs (1) | — | (3,340 | ) | — | (8,682 | ) | (10,173 | ) | |||||||||||||||||||
VEBA contribution (2) | — | — | — | (25,000 | ) | — | |||||||||||||||||||||
| Other (operating overhead, etc.) | — | 278 | — | (3,336 | ) | (7,843 | ) | ||||||||||||||||||||
| Cash cost of sales | $ | 189,084 | $ | 48,011 | $ | 454,422 | $ | 117,654 | $ | 54,188 | $ | 150,696 | $ | 181,936 | |||||||||||||
Adjusted EBITDA
We define Adjusted EBITDA as net income (loss) before net interest expense, income tax expense, depreciation and depletion, net reorganization items, restructuring costs, transaction and other costs, Mine No. 4 idle costs, non-cash stock compensation expense, and non-cash asset retirement obligation accretion.accretion, loss on early extinguishment of debt and other income. Adjusted EBITDA is used as a supplemental
financial measure by management and by external users of our financial statements, such as investors, industry analysts, lenders and ratings agencies, to assess:
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 the presentation of Adjusted EBITDA in this report provides information useful to investors in assessing our financial condition and results of operations. The GAAP measure most directly comparable to Adjusted EBITDA is net income (loss).income. Adjusted EBITDA should not be considered an alternative to net income or loss or any other measure of financial performance or liquidity presented in accordance with GAAP. Adjustments excludesexclude some, but not all, items that affect net loss and our presentation of Adjusted EBITDA may vary from that presented by other companies.
The following table presents a reconciliation of Adjusted EBITDA to net income, (loss), the most directly comparable GAAP financial measure, on a historical basis for each of the periods indicated.
| 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 | ||||||||||||||||
| Net income (loss) | $ | 119,717 | $ | (33,642 | ) | $ | 357,890 | $ | (83,705 | ) | $ | (61,816 | ) | |||||||
| Interest expense, net | 640 | 694 | 1,890 | 1,128 | 16,562 | |||||||||||||||
| Income tax (benefit) expense | (37,587 | ) | — | (2,881 | ) | — | 18 | |||||||||||||
| Depreciation and depletion | 23,393 | 22,538 | 57,625 | 38,359 | 28,958 | |||||||||||||||
Asset retirement obligation accretion (1) | 940 | 1,227 | 2,839 | 1,962 | 1,169 | |||||||||||||||
Stock compensation expense (2) | 233 | — | 1,155 | 125 | 390 | |||||||||||||||
Transaction and other costs (3) | — | — | 12,873 | 10,475 | — | |||||||||||||||
Reorganization items, net (4) | — | — | — | — | (7,920 | ) | ||||||||||||||
Restructuring costs (5) | — | — | — | — | 3,418 | |||||||||||||||
Mine No. 4 idle costs (6) | — | 3,340 | — | 8,682 | 10,173 | |||||||||||||||
VEBA contribution (7) | — | — | — | 25,000 | — | |||||||||||||||
| Adjusted EBITDA | $ | 107,336 | $ | (5,843 | ) | $ | 431,391 | $ | 2,026 | $ | (9,048 | ) | ||||||||
| For the three months ended March 31, | |||||||
| 2020 | 2019 | ||||||
| Net income | $ | 21,545 | $ | 110,447 | |||
| Interest expense, net | 7,533 | 8,592 | |||||
| Income tax expense | 3,241 | 27,984 | |||||
| Depreciation and depletion | 28,692 | 22,233 | |||||
Asset retirement obligation accretion (1) | 733 | 812 | |||||
Stock compensation expense (2) | 1,733 | 1,194 | |||||
Loss on early extinguishment of debt (3) | — | 9,756 | |||||
Other income(4) | (1,822 | ) | — | ||||
| Adjusted EBITDA | $ | 61,655 | $ | 181,018 | |||
| (1) | Represents non-cash accretion expense associated with our asset retirement obligations. |
| (2) | Represents non-cash stock compensation expense associated with equity awards. |
| (3) | Represents |
| (4) | Represents |
Results of Operations
Three Months Ended September 30, 2017March 31, 2020 and 2016 (Successor)2019
The following table summarizes certain unaudited financial information for the periods ended September 30, 2017 and 2016 (Successor).
| Successor | ||||||
| For the three months ended September 30, | ||||||
| (in thousands) | 2017 | 2016 | ||||
| Revenues: | ||||||
| Sales | $ | 302,958 | 44,395 | |||
| Other revenues | 8,997 | 8,496 | ||||
| Total revenues | 311,955 | 52,891 | ||||
| Costs and expenses: | ||||||
| Cost of sales (exclusive of items shown separately below) | 189,564 | 51,787 | ||||
| Cost of other revenues (exclusive of items shown separately below) | 6,985 | 6,998 | ||||
| Depreciation and depletion | 23,393 | 22,538 | ||||
| Selling, general and administrative | 9,243 | 4,516 | ||||
| Transaction and other costs | — | — | ||||
| Total costs and expenses | 229,185 | 85,839 | ||||
| Operating income (loss) | 82,770 | (32,948 | ) | |||
| Interest expense, net | (640 | ) | (694 | ) | ||
| Income before income taxes | 82,130 | (33,642 | ) | |||
| Income tax benefit | (37,587 | ) | — | |||
| Net income (loss) | $ | 119,717 | (33,642 | ) | ||
| Successor | |||||||
| For the three months ended September 30, | |||||||
| 2017 | 2016 | ||||||
| Met Coal (metric tons in thousands) | |||||||
| Metric tons sold | 1,908 | 503 | |||||
| Metric tons produced | 1,470 | 525 | |||||
| Average selling price per metric ton | $ | 158.78 | $ | 88.26 | |||
| Cash cost of sales per metric ton | $ | 99.10 | $ | 95.45 | |||
| Successor | ||||||
| (in thousands) | For the nine months ended September 30, 2017 (Unaudited) | % of Total Revenues | ||||
| Revenues: | ||||||
| Sales | $ | 895,802 | 96.4 | % | ||
| Other revenues | 33,487 | 3.6 | % | |||
| Total revenues | 929,289 | 100.0 | % | |||
| Costs and expenses: | ||||||
| Cost of sales (exclusive of items shown separately below) | 455,860 | 49.1 | % | |||
| Cost of other revenues (exclusive of items shown separately below) | 22,959 | 2.5 | % | |||
| Depreciation and depletion | 57,625 | 6.2 | % | |||
| Selling, general and administrative | 23,073 | 2.5 | % | |||
| Transaction and other costs | 12,873 | 1.4 | % | |||
| Total costs and expenses | 572,390 | 61.6 | % | |||
| Operating income | 356,899 | 38.4 | % | |||
| Interest expense, net | (1,890 | ) | (0.2 | )% | ||
| Income before income taxes | 355,009 | 38.2 | % | |||
| Income tax expense | (2,881 | ) | (0.3 | )% | ||
| Net income | $ | 357,890 | 38.5 | % | ||
| Successor | |||
| For the nine months ended September 30, 2017 (Unaudited) | |||
| Met Coal (metric tons in thousands) | |||
| Metric tons sold | 4,692 | ||
| Metric tons produced | 4,665 | ||
| Average selling price per metric ton | $ | 190.92 | |
| Cash cost of sales per metric ton | $ | 96.85 | |
| Successor | ||||||
| (in thousands) | For the six months ended September 30, 2016 (Unaudited) | % of Total Revenues | ||||
| Revenues: | ||||||
| Sales | $ | 129,810 | 89.9 | % | ||
| Other revenues | 14,555 | 10.1 | % | |||
| Total revenues | 144,365 | 100.0 | % | |||
| Costs and expenses: | ||||||
| Cost of sales (exclusive of items shown separately below) | 155,653 | 107.8 | % | |||
| Cost of other revenues (exclusive of items shown separately below) | 12,124 | 8.4 | % | |||
| Depreciation and depletion | 38,359 | 26.6 | % | |||
| Selling, general and administrative | 10,331 | 7.2 | % | |||
| Transaction and other costs | 10,475 | 7.3 | % | |||
| Total costs and expenses | 226,942 | 157.2 | % | |||
| Operating loss | (82,577 | ) | (57.2 | )% | ||
| Interest expense, net | (1,128 | ) | (0.8 | )% | ||
| Loss before income taxes | (83,705 | ) | (58.0 | )% | ||
| Income tax expense | — | — | ||||
| Net loss | $ | (83,705 | ) | (58.0 | )% | |
| Successor | |||
| For the six months ended September 30, 2016 (Unaudited) | |||
| Met Coal (metric tons in thousands) | |||
| Metric tons sold | 1,526 | ||
| Metric tons produced | 1,353 | ||
| Average selling price per metric ton | $ | 85.07 | |
| Cash cost of sales per metric ton | $ | 77.10 | |
| Predecessor | For the three months ended March 31, | ||||||||||||||||||
| (in thousands) | For the three months ended March 31, 2016 | % of Total Revenues | 2020 | % of Total Revenues | 2019 | % of Total Revenues | |||||||||||||
| Revenues: | |||||||||||||||||||
| Sales | $ | 65,154 | 91.3 | % | $ | 221,338 | 97.6 | % | $ | 369,681 | 97.7 | % | |||||||
| Other revenues | 6,229 | 8.7 | % | 5,382 | 2.4 | % | 8,609 | 2.3 | % | ||||||||||
| Total revenues | 71,383 | 100.0 | % | 226,720 | 100.0 | % | 378,290 | 100.0 | % | ||||||||||
| Costs and expenses: | |||||||||||||||||||
| Cost of sales (exclusive of items shown separately below) | 72,297 | 101.3 | % | 151,514 | 66.8 | % | 182,628 | 48.3 | % | ||||||||||
| Cost of other revenues (exclusive of items shown separately below) | 4,698 | 6.6 | % | 7,561 | 3.3 | % | 7,745 | 2.0 | % | ||||||||||
| Depreciation and depletion | 28,958 | 40.6 | % | 28,692 | 12.7 | % | 22,233 | 5.9 | % | ||||||||||
| Selling, general and administrative | 9,008 | 12.6 | % | 8,456 | 3.7 | % | 8,905 | 2.4 | % | ||||||||||
| Other postretirement benefits | 6,160 | 8.6 | % | ||||||||||||||||
| Restructuring cost | 3,418 | 4.8 | % | ||||||||||||||||
| Total costs and expenses | 124,539 | 174.5 | % | 196,223 | 86.5 | % | 221,511 | 58.6 | % | ||||||||||
| Operating loss | (53,156 | ) | (74.5 | )% | |||||||||||||||
| Operating income | 30,497 | 13.5 | % | 156,779 | 41.4 | % | |||||||||||||
| Interest expense, net | (16,562 | ) | (23.2 | )% | (7,533 | ) | (3.3 | )% | (8,592 | ) | (2.3 | )% | |||||||
| Reorganization items, net | 7,920 | 11.1 | % | ||||||||||||||||
| Loss before income taxes | (61,798 | ) | (86.6 | )% | |||||||||||||||
| Loss on early extinguishment of debt | — | — | % | (9,756 | ) | (2.6 | )% | ||||||||||||
| Other income | 1,822 | 0.8 | % | — | — | % | |||||||||||||
| Income before income taxes | 24,786 | 10.9 | % | 138,431 | 36.6 | % | |||||||||||||
| Income tax expense | 18 | — | 3,241 | 1.4 | % | 27,984 | 7.4 | % | |||||||||||
| Net loss | $ | (61,816 | ) | (86.6 | )% | ||||||||||||||
| Net income | $ | 21,545 | 9.5 | % | $ | 110,447 | 29.2 | % | |||||||||||
Sales and cost of sales components on a per unit basis for the three months ended March 31, 2016 (Predecessor)2020 and 2019 were as follows:
| Predecessor | For the three months ended March 31, | |||||||||
For the three months ended March 31, 2016 | 2020 | 2019 | ||||||||
| Met Coal (metric tons in thousands) | ||||||||||
| Metric tons sold | 777 | 1,646 | 1,901 | |||||||
| Metric tons produced | 801 | 1,904 | 2,084 | |||||||
Gross price realization(1) | 89 | % | 98 | % | ||||||
| Average selling price per metric ton | $ | 83.85 | $ | 134.47 | $ | 194.47 | ||||
| Cash cost of sales per metric ton | $ | 69.74 | $ | 91.55 | $ | 95.71 | ||||
Sales for the three months ended March 31, 2020 were $71.4$221.3 million compared to $369.7 million for the three months ended March 31, 2016.2019. The $148.3 million decrease in revenues was primarily driven by a $98.9 million decrease in revenues related to a $60.00 decrease in the average selling price per metric ton of met coal, combined with a $49.6 million decrease in revenues due to a 255 thousand metric ton decrease in met coal sales volume.
For the three months ended March 31, 2020, our geographic customer mix was 54% in Europe, 26% in South America and 20% in Asia. For the three months ended March 31, 2019, our geographic customer mix was 49% in Europe and 27% in Asia and 24% in South America. Our geographic customer mix typically varies each period based on the timing of customer orders and shipments. There were $65.2no significant changes in our customer base for the three months ended March 31, 2020.
Other revenues for the three months ended March 31, 2020 were $5.4 million compared to $8.6 million for the three months ended March 31, 2016, and were comprised of met coal sales of 0.8 million metric tons at an average selling price of $83.85 per metric ton.
2019. Other revenues were $6.2 million, and wereare comprised of revenue derived from our natural gas operations, gains on sales and disposals of property, plant and equipment and land, as well as earned royalty revenue. The $3.2 million decrease in other revenues is primarily due to a decrease in average gas selling prices. Cost of other revenues for the period was $4.7 million, representing 6.6% of total revenues and 75.4% of other revenues.consistent with the prior year period.
Cost of sales (exclusive of items shown separately below), was $72.3$151.5 million, or 101.3%66.8% of total revenues, and was primarily comprised of met coal sales of 0.8 million metric tons at an average cash cost of sales of $69.74 per metric ton. Our cost of sales were negatively impacted by carrying costs of $10.2 million for the idled Mine No. 4. During the three months ended March 31, 2016, only one longwall within Mine No. 7 was2020, compared to $182.6 million, or 48.3% of total revenues for the three months ended March 31, 2019. The $31.1 million decrease is primarily driven by a $24.4 million decrease due to a 255 thousand metric ton decrease in operation.met coal sales volumes combined with a $6.6 million decrease due to a $4.16 decrease in average cash cost of sales per metric ton.
Depreciation and depletion expense was $29.0$28.7 million, or 40.6%12.7% of total revenues, for the three months ended March 31, 2020, compared to $22.2 million, or 5.9% for the three months ended March 31, 2019. The $6.5 million increase in depreciation and was primarily related to depreciation of machinery and equipment and mine development costs.depletion is driven by an increase in depreciable assets.
Selling, general and administrative expenses were $9.0$8.5 million, or 12.6%3.7% of total revenues, and were primarily comprised of employee salaries and benefits.
Interest expense, net was $7.5 million, or 3.3% of total revenues, for the three months ended March 31, 2020, compared to $8.6 million, or 2.3% of total revenues, for the three months ended March 31, 2019. The $1.1 million decrease is driven by the retirement of debt of $131.6 million in the first quarter of 2019. Interest expense, net is comprised of interest on our Notes (as defined below) and ABL Facility and the amortization of debt issuance costs, offset partially by earned interest income.
For the three months ended March 31, 2019, we recognized a loss on early extinguishment of debt of $9.8 million upon the extinguishment of $131.6 million of our Notes (as defined below). The loss on early extinguishment of debt represents a premium paid to retire the debt, accelerated amortization of debt discount, net, and fees incurred in connection with the transaction.
Other income was $1.8 million, or 0.8% of total revenues, for the three months ended March 31, 2020. On July 15, 2015, Walter Energy, Inc. (“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 our acquisition of certain core operating assets of Walter Energy, we acquired a receivable 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 us in the Walter Canada CCAA proceedings. Walter Energy deemed these receivables to be impaired for the year ended December 31, 2015 and we did not assign any value to these receivables in acquisition accounting as collectability was deemed remote. In March 2020, we received an additional $1.8 million in settlement proceeds for the Shared Services Claim and Hybrid Debt Claim which is reflected as other income in the Condensed Statement of Operations. These settlement proceeds are in addition to the $22.8 million received in 2019. The 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 resolution of, the Walter Canada CCAA proceedings and cannot be predicted with certainty.
For the three months ended March 31, 2020, we utilized a discrete period method to calculate taxes, as we do not believe that the annual effective tax rate method represents a reliable estimate given the current uncertainty surrounding the recent outbreak of COVID-19 and its impact on our annual guidance. For the three months ended March 31, 2020, we
recognized income tax expense of $3.2 million which was principally offset by the utilization of NOLs for cash tax purposes. For the three months ended March 31, 2019, we recognized income tax expense of $28.0 million.
On March 27, 2020, the President of the United States signed and enacted into law 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 AMT credits. The CARES Act also provides opportunities for businesses to improve their cash flows by obtaining refunds for prior taxable years and reducing 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 result, we recorded an adjustment of approximately $11.3 million to reclassify 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 recognition of a full valuation allowance.CARES Act on our business, financial results and disclosures.
Liquidity and Capital Resources
Overview
Our sources of cash have been met coal and natural gas sales to customers, proceeds received from the Rights Offeringissuance of the Notes (as defined below) and access to our ABL Facility and the Offering. OurFacility. Historically, our primary uses of cash have been for funding the operations of our met coal and natural gas production operations, our capital expenditures, our reclamation obligations, payment of principal and interest on our Notes, professional fees and other costs incurred in connection with the Asset Acquisition and our IPO.non-recurring transaction expenses. In addition, we usehave used available cash on hand to repurchase shares of our common stock, pay our quarterly dividend, used cash on hand todividends, and pay the Special Distribution, and will use cash on hand to pay the November Special Dividend,special dividends, each of which reduces cash and cash equivalents.
Going forward, we may needwill use cash to fund debt service payments on our Notes, the ABL Facility and our other indebtedness, to fund operating activities, working capital, capital expenditures, and strategic investments.investments, and, if declared, to pay our quarterly and/or special dividends. Our ability to fund our capital needs going forward will depend on our ongoing ability to generate cash from operations and borrowing availability under the ABL Facility, and, in the case of any future strategic investments, or capital expenditures, or special dividends financed partially or wholly with debt financing, our ability to access the debt and equitycapital markets to raise additional capital.
Our ability to generate positive cash flow from operations in the future will be, at least in part, dependent on continued stable global economic conditions. In March 2020, the WHO declared the outbreak of COVID-19 as a global pandemic. There is significant uncertainty as to the effects of this pandemic on the global economy, which in turn may, among other things, impact our ability to generate positive cash flows from operations, fund capital expenditure needs and successfully execute and fund key initiatives, such as the development of Blue Creek. As events relating to COVID-19 continue to develop globally and impact the capital markets, our liquidity could also be adversely impacted due to possible deterioration in our customers' financial condition and their ability to timely pay outstanding receivables owed to us.
Our available liquidity as of March 31, 2020 was $302.8 million, consisting of cash and cash equivalents of $256.7 million and $46.1 million available under our ABL Facility. As of March 31, 2020, there was $70.0 million outstanding under the ABL Facility, with $46.1 million available, net of outstanding letters of credit of $8.9 million. For the three months ended March 31, 2020, cash flows provided by operating activities were $21.0 million, cash flows used in investing activities were $20.2 million and cash flows provided by financing activities were $62.6 million.
We believe that our future cash flowflows from operations, together with cash on our balance sheet and borrowing availability under ourproceeds from the ABL Facility,Draw, will provide adequate resources to fund our debt service payments and planned operating and capital expenditure needs for at least the next twelve months. However, as the impact of the COVID-19 pandemic on the economy and our operations evolves, we will continue to assess our liquidity needs. A continued worldwide disruption could materially affect our future access to our sources of liquidity, particularly our cash flows from operations, financial condition, capitalization and capital investments. In the event of a sustained market deterioration, we may need additional liquidity, which would require us to evaluate available alternatives and take appropriate actions.
If our cash flows from operations are less than we require, we may need to incur additional debt or issue additional equity. From time to time we may need to access the long-term and short-term capital markets to obtain financing. Although we believe we can currently finance our operations on acceptable terms and conditions, ourOur access to, and the availability of, financing on acceptable terms and conditions in the future will be affected by many factors, including: (i) our credit ratings, (ii) the liquidity of the overall capital markets, (iii) the current state of the global economy and
(iv) restrictions in our ABL Facility, the Indenture (as defined below), and any other existing or future debt agreements. There can be no assurance that we will have or continue to have access to the capital markets on terms acceptable to us. See “Part II, Item 1A. Risk Factors.”
Statements of Cash Flows
Cash balances were $234.1$256.7 million and $150.0$193.4 million at September 30, 2017 (Successor)March 31, 2020 and December 31, 2016 (Successor),2019, respectively.
The following table sets forth, a summary of the net cash provided by (used in) operating, investing and financing activities for the period (in thousands):
| 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 | ||||||||||||||||
| Net cash provided by (used in) operating activities | $ | 116,109 | $ | 7,521 | $ | 343,066 | $ | (21,367 | ) | $ | (40,698 | ) | ||||||||
| Net cash provided by (used in) investing activities | (34,408 | ) | 6,500 | (62,671 | ) | (27,730 | ) | (5,422 | ) | |||||||||||
| Net cash provided by (used in) financing activities | (3,440 | ) | (1,228 | ) | (197,644 | ) | 193,492 | (6,240 | ) | |||||||||||
| Net increase (decrease) in cash and cash equivalents and restricted cash | $ | 78,261 | $ | 12,793 | $ | 82,751 | $ | 144,395 | $ | (52,360 | ) | |||||||||
| For the three months ended March 31, | |||||||
| 2020 | 2019 | ||||||
| Net cash provided by operating activities | $ | 21,022 | $ | 126,408 | |||
| Net cash used in investing activities | (20,219 | ) | (29,739 | ) | |||
| Net cash provided by (used in) financing activities | 62,557 | (147,332 | ) | ||||
| Net increase in cash and cash equivalents and restricted cash | $ | 63,360 | $ | (50,663 | ) | ||
Operating Activities
Net cash flows from operating activities consist of net income (loss) adjusted for noncash items, such as depreciation and depletion of property, plant and equipment and mineral interests, deferred income tax expense, (benefit), stock-based compensation, non-cash reorganization items, amortization of debt issuance costs and debt discount,discount/premium, accretion of asset retirement obligations, loss on early extinguishment of debt and changes in net working capital. The timing between the conversion of our billed and unbilled receivables into cash from our customers and disbursements to our vendors is the primary driver of changes in our working capital.
Net cash provided by operating activities was $343.1$22.7 million for the ninethree months ended September 30, 2017 (Successor),March 31, 2020, and was primarily attributed to net income of $357.9$21.5 million adjusted for depreciation and depletion expense of $57.6$28.7 million, deferred income tax expense of $3.2 million, stock based compensation expense of $1.2$1.7 million, accretion of asset retirement obligations of $0.7 million and amortization of debt issuance costs and debt discountdiscount/premium, net of $1.3$0.4 million, and accretion of asset retirement obligations of $2.8 million, offset bycoupled with a net increase in our working capital of $68.0 million.$37.5 million since December 31, 2019. The increase in our working capital was primarily driven by an increase in trade accounts receivables and other receivables, an increase in prepaid expenses and other current assetsinventory offset partially by an increase in accounts payable, accrued
Net cash provided by operating activities was $116.1$126.4 million for the three months ended September 30, 2017 (Successor),March 31, 2019 and was primarily attributed to net income of $119.7$110.4 million adjusted for income tax expense of $28.0 million, depreciation and
depletion expense of $23.4$22.2 million, loss on early extinguishment of debt of $9.8 million, stock based compensation expense of $0.2
$1.2 million, amortization of debt issuance costs and debt discountdiscount/premium of $0.4 million and accretion of asset retirement
obligations of $0.9$0.8 million, offset bycoupled with a net increase in our working capital of $22.7$49.2 million. The increase in our working
capital was primarily driven by an increase in trade accounts receivablesreceivable and other receivables, an increase in prepaid expenses and other current assets,inventories coupled with a decrease in accrued
expenses and other current liabilities offset partially by a decrease in inventories and an increase in accounts payable.payable and prepaid expenses. The increase in
our accounts receivable and the decrease in inventories isinventory was primarily driven by an increase in metric tons sold and the increase in other receivables is primarily due to the recognition of an income tax receivable of $17.0 million which represents the overpayment of estimated quarterly tax payments as a result of the change in the application of Section 382 in computing tax expense.
Investing Activities
Net cash used in investing activities was $62.7 million, $34.4$20.2 million and $5.4$29.7 million for the nine months ended September 30, 2017 (Successor), the three months ended September 30, 2017 (Successor) and three months ended March 31, 2016 (Predecessor),2020 and March 31, 2019, respectively, primarily due to purchases of property, plant and equipment. Net cash used in investing activities was $27.7 million for the six months ended September 30, 2016 (Successor) primarily as a result of the cash used in connection with the Asset Acquisitionequipment and the purchase of U.S. Treasury bills posted as collateral for the self-insured black lung claims that were assumed in the Asset Acquisition of $17.5 millionmine development offset partially by proceeds received from the terminationa net sale of a Walter Energy life insurance policy. Net cash provided by investing activities was $6.5 million for the three months ended September 30, 2016 (Successor) primarily as a result of proceeds received from the termination of a Walter Energy life insurance policy offset partially by the purchase of U.S. Treasury bills posted as collateral for the self-insured black lung claims that were assumed in the Asset Acquisition.short-term investments.
Financing Activities
Stock Repurchase Program
On March 26, 2019, our board of directors (the "Board") approved our second stock repurchase program (the “Stock Repurchase Program”) that authorizes repurchases of up to an aggregate of $70.0 million of our outstanding common stock. We fully exhausted our previous stock repurchase program of $40.0 million of our outstanding common stock. The Stock Repurchase Program does not require us to repurchase a specific number of shares or have an expiration date. The Stock Repurchase Program may be suspended or discontinued by the Board at any time without prior notice.
Under the Stock Repurchase Program, we may repurchase shares of our common stock from time to time, in amounts, at prices and at such times as we deem appropriate, subject to market and industry conditions, share price, regulatory requirements as determined from time to time by us and other considerations. Our 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 Exchange Act and repurchases may be executed pursuant to Rule 10b5-1 under the Exchange Act. Repurchases will be subject to limitations in the ABL Facility and the Indenture. We intend to fund repurchases under the New Stock Repurchase Program from cash on debt.hand and/or other sources of liquidity.
As of March 31, 2020, we have repurchased 500,000 shares for approximately $10.6 million, leaving approximately $58.8 million of share repurchases authorized under the Stock Repurchase Program.
In light of the uncertainties resulting from the COVID-19 pandemic and as a precautionary measure to preserve liquidity, the Company is temporarily suspending its Stock Repurchase Program. The Company will continue to monitor its liquidity in light of the pandemic and will consider when to reinstate the program.
Dividend Policy
On May 17, 2017, the board of directors of the Company (the "Board")Board adopted a dividend 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 generateswe generate 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 implementationrepurchase of common stock pursuant to 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 market conditions, future financial performance and other strategic investment opportunities. The CompanyWe will also seek to optimize itsour capital structure to improve returns to stockholders while allowing flexibility for the Companyus to pursue very selective strategic growth opportunities that can provide compelling stockholder returns.
The Company has paid a regular quarterly cash dividend of $0.05 per share every quarter since the Board adopted the
Dividend Policy. As of March 31, 2020, the Company has paid $31.9 million of regular quarterly cash dividends under the
Dividend Policy.
On July 31, 2017,April 24, 2020, the Board declared a regular quarterly cash dividend of $0.05 per share, totaling $2.7approximately $2.6 million, which waswill be paid on August 23, 2017,May 11, 2020 to stockholders of record as of the close of business on August 14, 2017.May 5, 2020.
As the Company continues to monitor its liquidity in light of the COVID-19 pandemic, the Company may decide to suspend its Dividend Policy in the future if the Board deems it to be necessary or appropriate.
April 2019 Special Dividend
On October 25, 2017,April 23, 2019, the Board declared a regular quarterlyspecial cash dividend of $0.05$4.41 per share (the "April 2019 Special Dividend"), totaling $2.7approximately $230.0 million, to bewhich was paid on November 10, 2017,May 14, 2019 to stockholders of record as of the close of business on November 3, 2017.May 6, 2019.
ABL Facility
We intend to retain these funds in cash to preserve liquidity amid the growing uncertainty surrounding the COVID-19 outbreak. The ABL Draw, which is a proactive measure similar to actions taken by other public companies, is one of the Company’s precautionary measures taken to reduce risk during these unprecedented times.
The ABL Facility contains customary covenants for asset-based credit agreements of this type, including among other things: (i) requirements to deliver financial statements, other reports and notices; (ii) restrictions on the existence or incurrence of certain indebtedness; (iii) restrictions on the existence or incurrence of certain liens; (iv) restrictions on making certain restricted payments; (v) restrictions on making certain investments; (vi) restrictions on certain mergers, consolidations and asset dispositions; (vii) restrictions on certain transactions with affiliates; and (viii) restrictions on modifications to certain indebtedness. Additionally, the ABL Facility contains a springing fixed charge coverage ratio of not less than 1.00 to 1.00, which ratio is tested if availability under the ABL Facility is less than a certain amount. As of September 30, 2017 (Successor),March 31, 2020, we were not subject to this covenant. Subject to customary grace periods and notice requirements, the ABL Facility also contains customary events of default.
We were in compliance with all applicable covenants under the ABL Facility as of September 30, 2017 (Successor).March 31, 2020.
Senior Secured Notes
On November 2, 2017, we consummated the Offering ofissued $350.0 million aggregate principal amount of our 8.00% senior secured notesSenior Secured Notes due 2024. The Notes mature on November 1, 2024 and are fully and unconditionally guaranteed on a joint and several basis by each(the "Original Notes"). We then issued an additional $125.0 million in aggregate principal amount of our direct8.00% Senior Secured Notes due 2024 (the “New Notes” and, indirect wholly-owned domestic restricted subsidiaries that are guarantorstogether with the Original Notes, the "Notes") on March 1, 2018. The New Notes were issued as "Additional Notes" under the ABL Facility (subject to customary release provisions). The Notes are governed by an indenture dated as of November 2, 2017.2017 (the "Original Indenture"), among us, 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 accrue interest at 8.00% per annum and are payable semi-annually in arrears on May 1 and November 1 of each year. We 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 the November Special Dividend.
Offers to customary release provisions).
On February 21, 2019, we commenced an offer to purchase (the “Restricted Payment Offer”), in whole or in part, at a price equalcash, up to 100.00% of the$150,000,000 principal amount of theour outstanding Notes, redeemed plus the Applicable Premium (as defined in the indenture) 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%a repurchase price of 103% 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 thesuch Notes, plus accrued and unpaid interest if any,with respect to such Notes to, but excludingnot including, the redemption date. The Company is also required to make offersdate of repurchase (the “Restricted Payment Repurchase Price”). Concurrently with, but separate from, the Restricted Payment Offer, we 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 (i) at a purchaserepurchase price of 101.00%104.25% of the aggregate 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 thereof 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,Notes, plus accrued and unpaid interest if any, to, but excludingnot including, the date of purchase.repurchase (the “TO Repurchase Price”). The Offers expired at 5:00 P.M., New York City time, on March 22, 2019 (such date and time, the “Expiration Date”).
Restricted Payment Offer
As of September 30, 2017 (Successor)the Expiration Date, $1,900,000 aggregate principal amount of the Notes were validly tendered and not validly withdrawn pursuant to the Restricted Payment Offer. Pursuant to the terms of the Restricted Payment Offer:
(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) we had debt outstandingaccepted all $599,000 aggregate principal amount of $4.4the 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.
We consummated the Restricted Payment Offer on March 25, 2019.
Accordingly, pursuant to the terms of the Indenture, we were permitted to make one or more restricted payments in the form of special dividends to holders of our common stock and/or repurchases of our common stock in the aggregate amount of up to $299,401,000 (the "RP Basket") without having to make another offer to repurchase Notes. We used a portion of the RP Basket to pay a special cash dividend totaling approximately $230.0 million, $2.9 million of which was classified as current, which represents a security agreement and promissory note assumed in the Asset Acquisition. The promissory note maturespaid to stockholders on March 31,May 14, 2019 and bears a fixed interest rateintend to use the remainder of 4.00% per annum. We are requiredthe RP Basket to make periodic payments of principal and interest overrepurchases under the term of the promissory note. The promissory note is secured by the underground mining equipment it was used to purchase.Stock Repurchase Program.
Tender Offer
As of September 30, 2017 (Successor), restricted cash included $1.4 million in other long-term assetsthe 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 Condensed Balance SheetTender Offer (rounded down to avoid the purchase of Notes in a principal amount other than in integrals of $1,000), which represents amounts fundedresulted in $130,966,000 aggregate principal amount of the Notes (the “TO Pro-Rated Tendered Notes”);
(2) we 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 an escrow account as collateral for coal royalties due under certain underground coal mining lease contracts.the tendering holder of the Notes.
We consummated the Tender Offer on March 26, 2019. In connection with the payment, we recognized a loss on early extinguishment of debt of $9.8 million.
Capital Expenditures
Our mining operations require investments to maintain, expand, upgrade or enhance our operations and to comply with environmental regulations. Maintaining and expanding mines and related infrastructure is capital intensive. Specifically, the exploration, permitting and development of met coal reserves, mining costs, the maintenance of machinery and equipment and compliance with applicable laws and regulations require ongoing capital expenditures. While a significant amount of the capital expenditures required at our mines has been spent, we must continue to invest capital to maintain our production. In addition, any decisions to increase production at our mines or to developregarding the development of the high-quality met coal recoverable reserves at our Blue Creek Energy Mine in the future could also affect our capital needs or cause future capital expenditures to be higher than in the past and/or higher than our estimates.
To fund our capital expenditures, we may be required to use cash from our operations, incur debt or sell equity securities. Our ability to obtain bank financing or our ability to access the capital markets for future equity or debt offerings may be limited by our financial condition at the time of any such financing or offering and the covenants in our current or future debt agreements, as well as by general economic conditions, contingencies and uncertainties, including as a result of the COVID-19 pandemic, that are beyond our control.
Our capital expenditures were $34.4$22.8 million and $62.7 million for the three and nine months ended September 30, 2017 (Successor), respectively, $2.4 million and $8.4 million for the three and six months ended September 30, 2016 (Successor), respectively, and $5.4$24.4 million for the three months ended March 31, 2016 (Predecessor).2020 and March 31, 2019, respectively. Capital expenditures for these periods primarily related to investments required to maintain our property, plant and equipment. We expect thatOur deferred mine development costs were $3.7 million for the long lead times on purchasing new equipment or rebuilding key pieces of machinerythree months ended March 31, 2020 and equipment will result in the majority of our capital expendituresrelate to occur in the second half of 2017.Mine No. 4. We evaluate our spending on an ongoing basis in connection with our mining plans and the prices of met coal taking into consideration the funding available to maintain our operations at optimal production levels.
As a result of the COVID-19 pandemic and the unprecedented period of uncertainty, including the unknown duration and overall impact on our operations and the global economy, the Company is withdrawing its full-year 2020 guidance issued on February 19, 2020.
Blue Creek
We believe that Blue Creek represents one of the few remaining untapped reserves of premium high volatility ("High Vol") A met coal in the United States and that it has the potential to provide us with meaningful growth. We believe that the
combination of a low production cost and the high quality of the High Vol A met coal mined from Blue Creek, assuming we achieve our expected price realizations, will generate some of the highest met coal margins in the U.S., generate strong investment returns for us and achieve a rapid payback of our investment across a range of met coal price environments.
According to our third party reserve report, Blue Creek contains approximately 103.0 million metric tons of recoverable reserves and we have the ability to acquire adjacent reserves that would increase total reserves to over 170 million metric tons. We expect that Blue Creek will have a mine life of approximately 50 years assuming a single longwall operation.
Our third-party reserve report also indicates that, once developed, Blue Creek will produce a premium High Vol A met coal that is characterized by low-sulfur and high CSR. High Vol A met coal has traditionally priced at a discount to the Australian Premium Low Vol and the U.S. Low Vol coals; however, in the last eighteen months, it has been priced at or slightly above these coals. Warrior expects High Vol A coals will continue to become increasingly scarce as a result of Central Appalachian producers mining thinner and deeper reserves, which we expect will continue to support prices. This trend creates an opportunity for us to take advantage of favorable pricing dynamics driven by the declining supply of premium High Vol A met coal.
If we are able to successfully develop Blue Creek, we expect that it will be a transformational investment for us. We expect that the new single longwall mine at Blue Creek will have the capacity to produce an average of 3.9 million metric tons per annum of premium High Vol A met coal over the first ten years of production, thereby increasing our annual production capacity by 54%. This, in turn, would expand our product portfolio to our global customers by allowing us to offer three premium hard coking coals from a single port location. Given these factors, and assuming we achieve expected price realizations, we believe that we will achieve some of the highest premium met coal margins in the United States.
The COVID-19 pandemic has substantially affected national and international financial markets, which could affect our ability to obtain financing for Blue Creek. The extent to which COVID-19 will impact our business and our financial results will depend on future developments, which are highly uncertain and cannot be predicted. Such developments may include the geographic spread of the virus, the severity of the disease, the duration of the outbreak, the actions that may be taken by various governmental authorities in response to the outbreak and the impact on the U.S. or global economy. As a result of this uncertainty, we have delayed the budgeted $25.0 million development of the Blue Creek project until at least July 1, 2020.
Outlook
As a result of the COVID-19 pandemic and the unprecedented period of uncertainty, including the unknown duration and overall impact on our operations and the global economy, we are withdrawing our full-year 2020 guidance issued on February 19, 2020. Although we are aggressively managing our response to the recent COVID-19 pandemic, its impact on our full-year fiscal 2020 results and beyond is uncertain. The Company is taking a more conservative approach to managing its cash flow given this uncertainty, and is carefully managing operating expenses, working capital, and capital expenditures during this period, as well as suspending our Stock Repurchase Program. We have aalso implemented extensive preventative measures across all operations in order safeguard the health of our employees. 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 mask, gloves and other gear, eliminating visitors or vendors on property without strict screening process and testing temperatures of all employees. We believe that the most significant capital investment program underway in 2017 to upgrade all key production equipment to further improve efficiencyelements of uncertainty are the intensity and reliability. Our capital spending is expected to range from $97.0 to $110.0 million forduration of the full year 2017 (consisting of sustaining capital expenditures of approximately $65.0 million, catch-up capital expenditures of approximately $27.0 million and discretionary capital expenditures of approximately $18.0 million), including discretionary spending that had been deferred in prior yearsimpact on the global steel industry, primarily due to restrictions to contain the low met coal pricing environment. These amounts do not include any potential spending associated withvirus. However, we believe the execution of our Blue Creek Energy Mine should we decidestrategy will continue to develop itprovide attractive opportunities for productionprofitable growth in the future.long term following the recovery of the global economy from the effects of the COVID-19 pandemic.
Off-Balance Sheet Arrangements
In the ordinary course of our business, we are required to provide surety bonds and letters of credit to provide financial assurance for certain transactions and business activities. Federal and state laws require us to obtain surety bonds or other acceptable security to secure payment of certain long-term obligations including mine closure or reclamation costs and other miscellaneous obligations. As of September 30, 2017 (Successor),March 31, 2020, we had outstanding surety bonds and letters of credit with parties for post-mining reclamation at all of our U.S. mining operations totaling $37.9$40.3 million, and $2.1$2.2 million, respectively, for miscellaneous purposes.
Recently Adopted Accounting Standards
A summary of recently adopted accounting pronouncements is included in Note 2 of the "Notes to our unaudited interim condensed financial statements included elsewhereCondensed Financial Statements" in this Form 10-Q.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Commodity Price Risk
We are exposed to commodity price risk on sales of met coal. We sell most of our met coal under fixed supply contracts primarily with indexed pricing terms of three months and volume terms of up to one year.to three years. Sales commitments in the met coal market are typically not long-term in nature, and we are, therefore, subject to fluctuations in market pricing.
We occasionally enter into natural gas swap contracts to hedge the exposure to variability in expected future cash flows associated with the fluctuations in the price of natural gas related to our forecasted sales. As of September 30, 2017 (Successor), we had natural gas swap contracts outstanding with notional amounts totaling 1,980 million British thermal units maturing in the fourth quarter of 2017 and 2,400 million maturing in the fourth quarter of 2018. Our 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. All of our derivative instruments were entered into for hedging purposes rather than speculative trading.
We have exposure to price risk for supplies that are used directly or indirectly in the normal course of production, such as diesel fuel, steel, explosives and other items. We manage our risk for these items through strategic sourcing contracts in normal quantities with our suppliers. We historically have not entered into any derivative commodity instruments to manage the exposure to changing price risk for supplies.
Credit Risk
Financial instruments that potentially subject us to a concentration of credit risk consist principally of trade receivables. We provide our products to customers based on an evaluation of the financial condition of our customers. In some instances, we require letters of credit, cash collateral or prepayments from our customers on or before shipment to mitigate the risk of loss. Exposure to losses on receivables is principally dependent on each customer’s financial condition. We monitor the exposure to credit losses and maintain allowances for anticipated losses. As of September 30, 2017 (Successor)March 31, 2020 and December 31, 2016 (Successor),2019, we did not have any allowance for credit losses associated with our trade accounts receivables.
Interest Rate Risk
Our Notes have a fixed rate of interest of 8.00% per annum and are payable semi-annually in arrears on May 1 2016, we entered into theand November 1 of each year.
Our ABL Facility as amended, that bears an interest rate equal to LIBOR plus an applicable margin, which is based on the average availability of the commitments under the ABL Facility, ranging currently from 150 to 200 bpsbasis points. On March 24, 2020, the Company borrowed $70.0 million in a partial draw of the ABL Facility as a precautionary measure and in order to 250 bps. Anyincrease the Company's cash position and preserve financial flexibility in light of the current uncertainty resulting from the COVID-19 outbreak. The debt that we incur under the ABL Facility will exposeexposes us to interest rate risk. If interest rates increase significantly in the future, our exposure to interest rate risk will increase. As of September 30, 2017 (Successor), assuming we had $100.0March 31, 2020, based on the $70.0 million outstanding under our ABL Facility as of such date, a 100 bpsbasis point increase or decrease in interest rates would increase or decrease our annual interest expense under the ABL Facility by approximately $1.0$0.7 million. Furthermore, such interest rates under our ABL Facility are based upon benchmarks that are subject to potential change or elimination, including as a result of the announcement from the United Kingdom Financial Conduct Authority ("FCA"), which regulates LIBOR, that it intends to stop compelling banks to submit rates for the calculation of LIBOR after 2021.
Impact of Inflation
While inflation may impact our revenues and cost of sales, we believe the effects of inflation, if any, on our results of operations and financial condition have not been significant. However, there can be no assurance that our results of operations and financial condition will not be materially impacted by inflation in the future.
Except for the change in our long-term debt from a fixed rate obligation to include a variable rate obligation discussed above and the broader negative effects of the COVID-19 pandemic on the global economy and major financial markets, there have been no other material changes to our exposure from market risks from those disclosed in Part II, Item 7a. Quantitative and Qualitative Disclosure about Market Risk of our Form 10-K.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
As required by Rule 13a-15(b) under the Securities Exchange Act, of 1934, as amended (the “Exchange Act”), our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) under the Exchange Act) as of September 30, 2017.March 31, 2020. Based on the evaluation of our disclosure controls and procedures as of September 30, 2017,March 31, 2020, our Chief Executive Officer and Chief Financial Officer have concluded that, as of September 30, 2017,March 31, 2020, our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is (1) recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and (2) accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosures.
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting that occurred during our most recently completed fiscal quarter that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Limitations on the Effectiveness of Disclosure Controls and Procedures
In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
See Note 910 of the “Notes to Condensed Financial Statements” in this Form 10-Q for a description of current legal proceedings, which is incorporated by reference in this Part II, Item 1.
We and our subsidiaries are parties to a number of other lawsuits arising in the ordinary course of our business. We record 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 our 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. While the results of litigation cannot be predicted with certainty, we believe that the final outcome of such litigation will not have a material adverse effect on our financial statements.
Item 1A. Risk Factors.
There have been no material changes to the risk factors disclosed in “Risk Factors”"Risk Factors" in "Part 1, Item 1A. Risk Factors" in our IPO Prospectus and Part II, Item 1A. of our Quarterly2019 Annual Report on Form 10-Q for the quarter ended March 31, 2017.other than as described below. Our business, financial condition, operating results and cash flows can be impacted by a number of factors, any one of which could cause actual results to vary materially from recent results or from anticipated future results. In addition to the other information set forth in this report,Form 10-Q, you should carefully consider the risks discussed in “Management's Discussion and Analysis of Financial Condition and Results of Operations,” “Industry Overview,” and “Business”"Part I, Item 1A. Risk Factors" in our IPO Prospectus,2019 Annual Report, which could materially affect our business, financial condition or future results. However, the risks described below, in our IPO Prospectus and in our Quarterly2019 Annual Report on Form 10-Q for the quarter ended March 31, 2017 are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also may materially adversely affect our business, financial condition and/or operating results.
Our activities may be adversely affected by the global outbreak of the novel coronavirus (COVID-19), which may prevent us from meeting our targeted production levels and/or executing our planned development initiatives (including, but not limited to, the development of Blue Creek), negatively impact our customers’ demand for met coal and their ability to honor or renew contracts, adversely affect the health and welfare of Company personnel or prevent our vendors and contractors from performing normal and contracted activities.
The recent outbreak of COVID-19, which was first detected in Wuhan, China in December 2019 and declared a pandemic by the World Health Organization in March 2020, could have a material and adverse effect on our business, financial condition and results of operations. The outbreak has resulted, and may continue to result, in disruptions to economic and industrial activity worldwide. Though the global impact of COVID-19 is rapidly evolving and remains highly uncertain, the outbreak may ultimately cause a significant decline in global steel production and, in turn, reduce demand for met coal. As mentioned elsewhere in this quarterly report, we are highly dependent on the global steel industry. Our sales are primarily derived from coal shipments to customers located in regions that are, or may become, heavily affected by the COVID-19 outbreak, particularly Asia and Europe. Not only is steel production in these regions at risk of decline, but we may also face additional challenges in the event that transportation restrictions are put in place that affect our ability to deliver coal to our customers in these regions. These factors may influence our customers’ ability to honor or renew their contracts.
In addition to the potential impact on global met coal demand, COVID-19 may result in disruptions or restrictions on our employees’ ability to operate our coal mines in the ordinary course of business, which would restrict our production capacity. Similarly, we cannot predict how, if at all, the outbreak will affect our suppliers’ ability to provide the mining materials and equipment we require. If our production capacity or our ability to meet our supply needs is affected, our business and our financial results could be materially and adversely affected. Finally, the COVID-19 pandemic has substantially affected national and international financial markets, which could affect our ability to obtain financing for our business and/or pursue our planned development projects, including the development of our Blue Creek mine. The extent to which COVID-19 will impact our business and our financial results will depend on future developments, which are highly uncertain and cannot be predicted. Such developments may include the geographic spread of the virus, the severity of the disease, the duration of the outbreak, the actions that may be taken by various governmental authorities in response to the outbreak and the impact on the U.S. or global economy. As a result, at the time of this filing, it is impossible to predict the overall impact of COVID-19 on our business, liquidity, capital resources and financial results.
Deterioration in global economic conditions as they relate to the steelmaking industry, as well as generally unfavorable global economic, financial and business conditions, may adversely affect our business, results of operations and cash flows.
Demand for met coal depends on domestic and foreign steel demand. As a result, if economic conditions in the global steelmaking industry deteriorate as they have in past years, the demand for met coal may decrease. In addition, the global financial markets have been experiencing volatility and disruption over the last several years and, recently, due to the COVID-19 pandemic. These markets have experienced, among other things, volatility in security prices, commodities and currencies, diminished liquidity and credit availability, rating downgrades and declining valuations of certain investments. Weaknesses in global economic conditions have had an adverse effect and could have a material adverse effect on the demand for our met coal and, in turn, on our sales, pricing and profitability.
In addition, future governmental policy changes in foreign countries may be detrimental to the global coal market. For example, the Chinese government has from time to time implemented regulations and promulgated new laws or restrictions on their domestic coal industry, sometimes with little advance notice, which has impacted worldwide coal demand, supply and prices. During the past several years, the Chinese government has initiated a number of anti-smog measures aimed at reducing hazardous air emissions through temporary production capacity restrictions with the steel, coal and coal-fired power sectors. It is possible that policy changes from foreign countries may be detrimental to the global coal markets and, thus, impact our business, financial condition or results of operations.
If met coal prices drop to or below levels experienced in 2015 and the first half of 2016 for a prolonged period or if there are further downturns in economic conditions, particularly in developing countries such as China and India, our business, financial condition or results of operations could be adversely affected. While we are focused on cost control and operational efficiencies, there can be no assurance that these actions, or any others we may take, will be sufficient in response to challenging economic and financial conditions. In addition, the current level of met coal prices may not be sustainable.
Our business may suffer as a result of a substantial or extended decline in met coal pricing or the failure of any recovery or stabilization of met coal prices to endure, as well as any substantial or extended decline in the demand for met coal and other factors beyond our control, which could negatively affect our operating results and cash flows.
Our profitability depends on the prices at which we sell our met coal, which are largely dependent on prevailing market prices. A substantial or extended decrease in met coal pricing or the failure of a price recovery or stabilization following such decrease will negatively affect our operating cash flows. We have experienced significant price fluctuations in our met coal business, and we expect that such fluctuations will continue. For example, in the first quarter of 2016, the Australian HCC Benchmark settlement price fell to $81 per metric ton, while in late 2016 spot market prices passed $300 per metric ton with a first quarter 2017 Australian HCC Benchmark settlement price of $285 per metric ton. In 2019, the average Platts Index price for the first half of 2019 was $204.53 compared to an average price of $150.83 in the second half of 2019. In November 2019, the Platts Index price hit a three year low of approximately $132.00 per metric ton. Demand for, and therefore the price of, met coal is driven by a variety of factors, including, but not limited to, the following:
the domestic and foreign supply and demand for met coal;
the quantity and quality of met coal available from competitors;
the demand for and price of steel;
adverse weather, climatic and other natural conditions, including natural disasters;
domestic and foreign economic conditions, including slowdowns in domestic and foreign economies and financial markets;
global and regional political events;
domestic and foreign legislative, regulatory and judicial developments, environmental regulatory changes and changes in energy policy and energy conservation measures that could adversely affect the met coal industry;
capacity, reliability, availability and cost of transportation and port facilities, and the proximity of available met coal to such transportation and port facilities; and
other factors beyond our control, such as terrorism, war, and pandemics, including the COVID-19 pandemic.
The met coal industry also faces concerns with respect to oversupply from time to time, which could materially adversely affect our financial condition and results of operations. In addition, reductions in the demand for met coal caused by reduced steel
production by our customers, increases in the use of substitutes for steel (such as aluminum, composites or plastics) or less expensive substitutes for met coal and the use of steelmaking technologies that use less or no met coal can significantly adversely affect our financial results and impede growth. Our natural gas business is also subject to adverse changes in pricing due to, among other factors, changes in demand and competition from alternative energy sources.
The failure of our customers to honor or renew contracts could adversely affect our business.
A significant portion of the sales of our met coal is to customers with whom we have had a relationship for a long period of time. Typically, our customer contracts are for terms of one to three years or are evergreen with respect to contracted volumes. The success of our business depends on our ability to retain our current customers, renew our existing customer contracts and solicit new customers. Our ability to do so generally depends on a variety of factors, including the quality and price of our products, our ability to market these products effectively, our ability to deliver on a timely basis and the level of competition that we face. If our customers do not honor contract commitments, or if they terminate agreements or exercise force majeure provisions allowing for the temporary suspension of performance during specified events beyond the parties’ control, such as the COVID-19 pandemic, and we are unable to replace the contract, our revenues will be materially and adversely affected. Changes in the met coal industry may cause some of our customers not to renew, extend or enter into new met coal supply agreements or to enter into agreements to purchase fewer metric tons of met coal or on different terms than in the past.
Our ability to collect payments from our customers could be impaired and, as a result, our financial position could be materially and adversely affected if their creditworthiness deteriorates, if they declare bankruptcy, or if they fail to honor their contracts with us.
Our ability to receive payment for met coal sold and delivered depends on the continued creditworthiness and financial stability of our customers. A significant number of our customers are affected by the COVID-19 pandemic, which may result in a deterioration of their financial stability and, in some cases, a bankruptcy. If we determine that a customer is not creditworthy or if a customer declares bankruptcy, we may not be required to deliver met coal sold under the customer’s sales contract. If this occurs, we may decide to sell the customer’s met coal on the spot market, which may be at prices lower than the contracted price, or we may be unable to generate sufficient taxable income from future operations, or other circumstances could arise, which may limit or eliminate our abilitysell the met coal at all. In addition, if customers refuse to utilize our significant tax NOLs or maintain our deferred tax assets.
A significant reduction of, or loss of, purchases by our largest customers could materially adversely affect our profitability.
For the year ended December 31, 2019, we derived approximately 64.5% of our total sales revenues from our five largest customers. There are inherent risks whenever a significant percentage of total revenues are concentrated with a limited number of customers, and it is not possible for us to predict the future level of demand for our met coal that will be generated by our largest customers. We expect to renew, extend or enter into new supply agreements with these and other factors, a valuation allowance has been recorded againstcustomers; however, we may be unsuccessful in obtaining such agreements with these customers and these customers may discontinue purchasing met coal from us, reduce the quantity of met coal that they have historically purchased from us or pressure us to reduce the prices that we charge for our deferred tax assets,met coal due to market, economic or competitive conditions, including our NOLs. A valuation allowance was established on our opening balance sheet at April 1, 2016 because it was more likely than not that a portion of the acquired deferred tax assets would not be realized in the future. Certain factors could change or circumstances could arise that could further limit or eliminate the amount of the available NOLs to the Company, such as an ownership change or an adjustment by a tax authority, and could necessitate a change in our valuation allowance or our liability for income taxes. In addition, we have a limited operating history as a new standalone company, have incurred additional operating losses since the Asset Acquisition and have recorded additional deferred tax assets and valuation allowances with respect thereto. Also, certain circumstances, including our failing to generate sufficient future taxable income from operations, could limit our ability to fully utilize our deferred tax assets. At December 31, 2016, we recorded a valuation allowance of $767.3 million against all federal and state NOLs and gross deferred tax assets not expected to provide future tax benefits.
Substantially all of our NOLs and prevail in such challenge, all or a portionrevenues are derived from the sale of met coal. This lack of diversification of our NOLs, or our ability to utilize our NOLs to offset any future consolidated taxable income, may be impaired, whichbusiness could have a significant negative impact onadversely affect our financial condition, results of operations and cash flows.
All of our mining operations are located in Alabama, making us vulnerable to risks associated with having our production concentrated in one geographic area.
All of our mining operations are geographically concentrated in Alabama. As a result of this concentration, we may be disproportionately exposed to the limitation rulesimpact of Section 382 is applicable to certain companies under the jurisdiction of a bankruptcy court. Due to certain uncertainties as to whether such exception applies to us, we filed a request for a private letter ruling from the IRS on these points.
If we fail to implement our business strategies successfully, our financial performance could be harmed.
Our future financial performance and success are or become, incorrect, inaccurate or incomplete, the private letter ruling may be invalidated anddependent in large part upon our ability to rely onsuccessfully implement our business strategies. We may not be able to implement our business strategies successfully or achieve the conclusions reached therein couldanticipated benefits. If we are unable to do so, our long-term growth, profitability and ability to service any debt we incur in the future may be jeopardized.
A key element of our business strategy involves increasing production at our existing mines and developing Blue Creek recoverable reserves in a cost efficient manner. As we expand our business activities, there will be additional demands on our financial, technical, operational and management resources. These aspects of our strategy are subject to numerous risks and uncertainties, including:
an inability to retain or hire experienced crews and other personnel and other labor relations matters;
a lack of customer demand for our mined met coal;
an inability to secure necessary equipment, raw materials or engineering in a timely manner to successfully execute our expansion plans;
unanticipated delays that could limit or defer the production or expansion of our mining activities and jeopardize our long term relationships with our existing customers and adversely affect our ability to obtain new customers for our mined met coal; and
a lack of available cash or access to sufficient debt or equity financing for investment in our expansion.
We may be unsuccessful or delayed in developing Blue Creek, which could significantly affect our operations and/or limit our long-term growth.
The development of Blue Creek will require substantial capital expenditures that we may not recover. In addition, during our development of Blue Creek we will face numerous financial, regulatory, environmental, political and legal uncertainties that are beyond our control or knowledge could impact whether an ownership change has occurred, we cannot give you any assurance that another Section 382 ownership change will not occur in the future. As a result of our qualifying for the aforementioned exception, were we to undergo a subsequent ownership change prior to April 1, 2018, our NOLs would effectively be reduced to zero. An ownership change after such date would subject our utilization of the NOLs to annual limitations pursuant to Section 382.
uncertainties in the future.national and worldwide economy and the price of met coal;
the diversion of management’s attention from our operations and dividend policy, limit existing mining operations;
our ability to react to changesobtain favorable tax or other incentives;
potential opposition from non-governmental organizations, local groups, or local residents;
the fact that our development, construction, ramp-up and operating costs may be higher than our estimates and further increase our planned capital expenditure and liquidity requirements;
shortages of construction materials and equipment or delays in the economydelivery of such materials and equipment;
unanticipated facility or our industry and prevent usequipment malfunctions or breakdowns;
delays from making debt service payments on the Notes.
failure to obtain, or delays in obtaining, all necessary governmental and third-party rights-of-way, easements, permits, licenses and approvals;
local infrastructure conditions therein).and other logistical challenges;
difficulties in development activities, introducing new technologies or exploiting business opportunities;integrating Blue Creek with our existing mining operations and failure to achieve any estimated economies of scale; and
We cannot assure you that we will be able to overcome these risks or successfully develop Blue Creek. If we are unable to complete, or are substantially delayed in completing, the development of Blue Creek, our business, financial condition, results of operations, cash flows and ability to pay dividends to our stockholders could be adversely affected. Furthermore, even if Blue Creek is successfully developed, constructed, and placed into operation, we cannot assure you that it will generateoperate at a profit sufficient to recover our total investment. In addition, if its development is successful, the operation of Blue Creek would exacerbate our existing mining and operation risks discussed elsewhere in this Form 10-Q and our 2019 Annual Report, including, but not limited to, risks related to increasing the concentration of our mining operations in Alabama, hazards and operating risks, transportation risks, liability risks and regulatory risks. See “-All of our mining operations are located in Alabama, making us vulnerable to risks associated with having our production concentrated in one geographic area” and "If transportation for our met coal is disrupted, unavailable or more expensive for our customers, our ability to sell met coal could suffer" in this Form 10-Q and "-Risks Related to Our Business-Met coal mining involves many hazards and operating risks, and is dependent upon many factors and conditions beyond our control, which may cause our profitability and financial position to decline”, “-Our business is subject to inherent risks, some for which we maintain third party insurance. We may incur losses and be subject to liability claims that could have a material adverse effect on our financial condition, results of operations or cash flows” and “-Our mines are subject to stringent federal and state safety regulations that increase our cost of doing business at active operations and may place restrictions on our methods of operation. In addition, federal, state or local regulatory agencies have the authority to order certain of our mines to be temporarily or permanently closed under certain circumstances, which could materially and adversely affect our ability to meet our customers’ demands” in "Part I, Item 1A. Risk Factors" of our 2019 Annual Report.
We are responsible for medical and disability benefits for black lung disease under federal law. We assumed certain historical self-insured black lung liabilities of Walter Energy and its subsidiaries incurred prior to April 1, 2016 in
connection with the Asset Acquisition. We are self-insured for these black lung liabilities and have posted certain collateral with the Department of Labor as described below. Changes in the estimated claims to be paid or changes in the amount of collateral required by the Department of Labor may have a greater impact on our profitability and cash flows in the future.
We are responsible for medical and disability benefits for black lung disease under the Federal Coal Mine Health and Safety Act of 1969, the Mine Act and the Black Lung Benefits Act, each as amended, and are self-insured for black lung related claims asserted by or on behalf of former employees of Walter Energy and its subsidiaries as assumed in the Asset Acquisition for the period prior to April 1, 2016. We perform an annual actuarial evaluation of the overall black lung liabilities as of each December 31st. The calculation is performed using assumptions regarding rates of successful claims, discount factors, benefit increases and mortality rates, among others. If the number of or severity of successful claims increases, or we are required to accrue or pay additional amounts because the successful claims prove to be more severe than our original assessment, our operating results and cash flows could be negatively impacted. Our self-insurance program for these legacy liabilities is unique to the industry and was specifically negotiated with the Department of Labor requiring us to post $17.0 million in surety bonds or Treasury bills as collateral in addition to maintaining a black lung trust of $3.3 million that was acquired in the Asset Acquisition. We received a letter from the Department of Labor on February 21, 2020 under its new process for self-insurance renewals that would require us to increase the amount of collateral posted to $39.8 million, but we have appealed such increase. For additional information see “Part I, Item 1. Business-Environmental and Regulatory Matters-Workers’ Compensation and Black Lung.” Our estimated total black lung liabilities as of December 31, 2019 were $32.5 million (net of the black lung trust). In future years, the Department of Labor could require us to increase the amount of the collateral which could negatively impact our cash flows.
Our failure to obtain and renew permits necessary for our mining operations could negatively affect our business.
Mining companies must obtain numerous permits that impose strict regulations on various environmental and operational matters in connection with met coal mining. These include permits issued by various federal, state and local agencies and regulatory bodies. The permitting rules, and the interpretations of these rules, are complex, change frequently and are often subject to discretionary interpretations by the regulators, all of which may make compliance more difficult or impractical, and may possibly preclude the continuance of ongoing operations or the development of future mining operations. The public, including non-governmental organizations, anti-mining groups and individuals, have certain statutory rights to comment upon and submit objections to requested permits and environmental impact statements prepared in connection with applicable regulatory processes, and otherwise engage in the permitting process, including bringing citizens’ lawsuits to challenge the issuance of permits, the validity of environmental impact statements or performance of mining activities. In addition, due to the COVID-19 pandemic, there may be delays in obtaining permits from governmental agencies and regulatory bodies. Accordingly, required permits may not be issued or renewed in a timely fashion or at all, or permits issued or renewed may be conditioned in a manner that may restrict our ability to efficiently and economically conduct our mining activities, any of which would materially reduce our production, cash flow and profitability.
If transportation for our met coal is disrupted, unavailable or more expensive for our customers, our ability to sell met coal could suffer.
Transportation costs represent a significant portion of the total cost of met coal to be delivered to our customers and, as a result, the cost of delivery is a factor in a customer’s purchasing decision. Overall price increases in our transportation costs could make our met coal less competitive with the same or alternative products from competitors with lower transportation costs. We typically depend upon overland conveyor, trucks, rail or barges to transport our products. Disruption or delays of any of these transportation services due to weather related problems, which are variable and unpredictable, strikes or lock-outs, accidents, infrastructure damage, governmental regulation, third-party actions, lack of capacity or other events beyond our control, such as the COVID-19 pandemic, could impair our ability to supply our products to our customers and result in lost sales and reduced profitability. In addition, increases in transportation costs resulting from emission control requirements and fluctuations in the price of gasoline and diesel fuel, could make met coal produced in one region of the United States less competitive than met coal produced in other regions of the United States or abroad.
All of our met coal mines are served by only one rail carrier, which increases our vulnerability to these risks, although our access to barge transportation partially mitigates that risk. In addition, the majority of the met coal produced by our underground mining operations is sold to met coal customers who typically arrange and pay for transportation from the state-run docks at the Port of Mobile, Alabama to the point of use. As a result, disruption at the docks, port congestion and delayed met coal shipments may result in demurrage fees to us. If this disruption were to persist over an extended period of time, demurrage costs could significantly impact our profits. In addition, there are limited cost effective alternatives to the port. The cost of securing additional facilities and services of this nature could significantly increase transportation and other costs. An interruption of rail or port services could significantly limit our ability to operate and, to the extent that alternate sources of port
and rail services are unavailable or not available on commercially reasonable terms, could increase transportation and port costs significantly. Further, delays of ocean vessels could affect our revenues, costs and relative competitiveness compared to the supply of met coal and other products from our competitors.
Our business is subject to the risk of increases or fluctuations in the cost, and delay in the delivery, of raw materials, mining equipment and purchased components.
Met coal mining consumes large quantities of commodities including steel, copper, rubber products, diesel and other liquid fuels, and requires the use of capital equipment. Some commodities, such as steel, are needed to comply with roof control plans required by regulation. The cost of roof bolts we use in our mining operations depends on the price of scrap steel. The prices we pay for commodities and capital equipment are strongly impacted by the global market. A rapid or significant increase in the costs of commodities or capital equipment we use in our operations could impact our mining operations costs because we may have a limited ability to negotiate lower prices and, in some cases, may not have a ready substitute.
We use equipment in our met coal mining and transportation operations such as continuous mining units, conveyors, shuttle cars, rail cars, locomotives, roof bolters, shearers and shields. Some equipment and materials are needed to comply with regulations, such as proximity detection devices on continuous mining machines. We procure some of this equipment from a concentrated group of suppliers, and obtaining this equipment often involves long lead times. Occasionally, demand for such equipment by mining companies can be high and some types of equipment may be in short supply. Delays in receiving or shortages of this equipment, as well as the raw materials used in the manufacturing of supplies and mining equipment, which, in some cases, do not have ready substitutes, or the cancellation of our supply contracts under which we obtain equipment and other consumables, could limit our ability to obtain these supplies or equipment. In addition, there continues to be consolidation in the supplier base providing mining materials and equipment, which has resulted in a limited number of suppliers for certain types of equipment and supplies. If any of our suppliers experiences an adverse event (including as a result of the COVID-19 pandemic), decides to cease producing products used by the mining industry, or decides to no longer do business with us, we may be unable to obtain sufficient equipment and raw materials in a timely manner or at a reasonable price to allow us to meet our production goals and our revenues may be materially adversely impacted.
We use considerable quantities of steel in the mining process. If the price of steel or other materials increases substantially or if the value of the U.S. dollar declines relative to foreign currencies with respect to certain imported supplies or other products, our operating expenses could increase. Any of the foregoing events could materially and adversely impact our business, financial condition, results of operations and cash flows.
Our business may require substantial ongoing capital expenditures, and we may not have access to the capital required to reach full productive capacity at our mines.
Maintaining and expanding mines and related infrastructure is capital intensive. Specifically, the exploration, permitting and development of met coal reserves, mining costs, the maintenance of machinery, facilities and equipment and compliance with applicable laws and regulations require ongoing capital expenditures. While a significant amount of the capital expenditures required at our mines has been spent, we must continue to invest capital to maintain our production. In addition, any decisions to increase production at our existing mines or the development of the high-quality met coal recoverable reserves at Blue Creek could also affect our capital needs or cause future capital expenditures to be higher than in the past and/or higher than our estimates. We cannot assure you that we will be able to draw under the ABL Facilitymaintain our production levels or otherwise, in an amountgenerate sufficient cash flow, or that we will have access to fundsufficient financing to continue our liquidity needs, including the payment of principalproduction, exploration, permitting and interestdevelopment activities at or above our present levels and on the Notes.
To fund our capital expenditures, we will be required to use cash from our operations, incur debt or sell assets, seek additional capitalequity securities. Using cash from operations will reduce cash available for maintaining or restructure or refinanceincreasing our indebtedness, including the Notes. These alternative measures may not be successful and may not permit us to meet our scheduled debt service obligations.operations activities. Our ability to restructureobtain bank financing or refinance our debt will depend on the condition ofability to access the capital markets andfor future equity or debt offerings, on the other hand, may be limited by our financial condition at the time of any such time. Any refinancing offinancing or offering and the covenants in our debt could be at higher interest rates and may require us to comply with more onerous covenants, which could further restrict our business operations. In addition, the terms of existing or future debt agreements, includingas well as by general economic conditions, contingencies and uncertainties that are beyond our control, such as the ABL Facility and the indenture governing the Notes, may restrict us from adopting some of these alternatives. In the absence of such operating results and resources, we could face substantial liquidity problems and might be required to dispose of material assetsCOVID-19 pandemic. If cash flow generated by our operations or operationsavailable borrowings under our bank financing arrangements are insufficient to meet our debt servicecapital requirements and other obligations. We may not be ablewe are unable to consummate those dispositions for fair market value or at all. Furthermore, any proceeds that we could realize from any such dispositions may not be adequate to meet our debt service obligations then due. Our inability to generate sufficient cash flow to satisfy our debt obligations, or to refinance our indebtednessaccess the capital markets on commercially reasonableacceptable terms or at all, we could be forced to curtail the expansion of our existing mines and the development of our properties, which, in turn, could lead to a decline in our production and could materially and adversely affect our business, financial condition and results of operations.
Our sales in foreign jurisdictions are subject to risks and uncertainties that may have a negative impact on our profitability.
Substantially all of our met coal sales consist of sales to international customers and we expect that international sales will continue to account for a substantial portion of our revenue. A number of foreign countries in which we sell our met coal implicate additional risks and uncertainties due to the different economic, cultural and political environments. Such risks and uncertainties include, but are not limited to:
longer sales-cycles and time to collection;
tariffs and international trade barriers and export license requirements, including any that might result from the current global trade uncertainties;
fewer or less certain legal protections for contract rights;
different and changing legal and regulatory requirements;
potential liability under the U.S. Foreign Corrupt Practices Act of 1977, as amended, or comparable foreign regulations;
government currency controls;
fluctuations in foreign currency exchange and interest rates; and
political and economic instability, changes, hostilities and other disruptions (including as a result of the COVID-19 pandemic), as well as unexpected changes in diplomatic and trade relationships.
Negative developments in any of these factors in the foreign markets into which we sell our met coal could result in a reduction in demand for met coal, the cancellation or delay of orders already placed, difficulty in collecting receivables, higher costs of doing business and/or non-compliance with legal and regulatory requirements, each or any of which could materially adversely impact our cash flows, results of operations and profitability.
The market price of our common stock may fluctuate significantly and investors in our common stock could incur substantial losses.
The market price of our common stock could fluctuate significantly due to a number of factors, including:
our quarterly or annual earnings, or those of other companies in our industry;
actual or anticipated fluctuations in our operating and financial results, including reserve estimates;
changes in accounting standards, policies, guidance, interpretations or principles;
the public reaction to our press releases, our other public announcements and our filings with the SEC;
announcements by us or our competitors of significant acquisitions, dispositions or innovations;
changes in financial estimates and recommendations by securities analysts following our stock, or the failure of securities analysts to cover our common stock;
changes in earnings estimates by securities analysts or our ability to meet those estimates;
the operating and stock price performance of other comparable companies;
declaration of bankruptcy by any of our customers or competitors;
general economic conditions, overall market fluctuations, changes in the price of met coal, steel or other commodities, including the impact of the COVID-19 pandemic on any of the foregoing;
additions or departures of key management personnel;
actions by our stockholders;
the trading volume of our common stock;
sales of our common stock by us or the perception that such sales may occur; and
changes in business, legal or regulatory conditions, or other developments (including the COVID-19 pandemic) affecting participants in, and publicity regarding, the met coal mining business, the domestic steel industry or any of our significant customers.
In particular, the realization of any of the risks described in these “Risk Factors” could have a material and adverse impact on the market price of our common stock in the future and cause the price of our stock to decline. In addition, the stock market in general has experienced extreme volatility that has often been unrelated to the operating performance of particular companies. These broad market fluctuations may adversely affect the trading price of our common stock, regardless of our actual performance. In the past, following periods of volatility in the market price of a company’s securities, stockholders have often instituted securities class action litigation against the company. If we were to be involved in a class action lawsuit, it could divert the attention of senior management, and, if adversely determined, have a material adverse effect on our business, results of operations and financial condition and could negatively impact our ability to satisfy our obligations under the Notes.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
The following table sets forth share repurchases of our common stock made during the quarter ended March 31, 2020:
| Period | Total Number of Shares Purchased | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Approximate dollar value of shares that may yet be purchased under the plans or programs(2) | ||||||
| January 1, 2020 - January 31, 2020 | ||||||||||
Stock Repurchase Program(1) | — | $ | — | — | $ | 59,000,000 | ||||
Employee Transactions(2) | 1,087 | $ | 21.13 | — | ||||||
| February 1, 2020 - February 29, 2020 | ||||||||||
Stock Repurchase Program(1) | — | $ | — | — | ||||||
Employee Transactions(2) | 42,125 | $ | 20.66 | — | ||||||
| March 1, 2020 - March 31, 2020 | ||||||||||
Stock Repurchase Program(1) | — | $ | — | — | ||||||
Employee Transactions(2) | 7,007 | $ | 16.89 | — | ||||||
| Total | 50,219 | — | ||||||||
__________
| (1) | On March 26, 2019, the Board approved the Stock Repurchase Program that authorizes repurchases of up to an aggregate of $70.0 million of our outstanding common stock. The Stock Repurchase Program does not require us to repurchase a specific number of shares or have an expiration date. |
| (2) | These shares were acquired to satisfy certain employees' tax withholding obligations associated with the lapse of restrictions on certain restricted stock awards granted under the 2016 Equity Incentive Plan and 2017 Equity Incentive Plan. Upon acquisition, these shares were retired. |
Item 3. Defaults on Senior Securities.
None.
Item 4. Mine Safety Disclosures.
The information concerning mine safety violations and other regulatory matters is filed as Exhibit 95 to this quarterly report on Form 10-Q pursuant to the requirements of Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of Regulation S-K (17 CFR 229.104).
Item 5. Other Information.
None.
Item 6. Exhibits
Exhibit Number | Description | |
| 3.1 | ||
| 3.2 | ||
| 3.3 | ||
| 4.2*** | ||
| 10.1***# | ||
| 10.2*† | ||
| 31.1* | ||
| 31.2* | ||
| 32.1** | ||
| 95* | ||
| XBRL | ||
| 101.SCH* | Inline XBRL Taxonomy Extension Schema Document | |
| 101.CAL* | Inline XBRL Taxonomy Extension Calculation LinkBase Document | |
| 101.DEF* | Inline XBRL Taxonomy Extension Definition LinkBase Document | |
| 101.LAB* | Inline XBRL Taxonomy Extension Label LinkBase Document | |
| 101.PRE* | Inline XBRL Taxonomy Extension Presentation LinkBase Document | |
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in | |
| * | Filed herewith. |
| ** | Furnished herewith. |
| *** | The hyperlink to this exhibit was incorrect in the registrant’s Annual Report on Form 10-K for the year ended |
December 31, 2019. The correct hyperlink is included in this Quarterly Report on Form 10-Q pursuant to instruction 2
of Rule 105(d) of Regulation S-T.
| † | Management contract, compensatory plan or arrangement. |
| # | The schedules to this agreement have been omitted for this filing pursuant to Item 601(b)(2) of Regulation S-K. The |
Company will furnish copies of such schedules to the SEC upon request.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| Warrior Met Coal, Inc. | |||
| By: | /s/ Dale W. Boyles | ||
| Dale W. Boyles | |||
| Chief Financial Officer (on behalf of the registrant and as Principal Financial and Accounting Officer) | |||
| Date: | |||