The accompanying notes are an integral part of these condensed financial statements.
The accompanying notes are an integral part of these condensed financial statements.
The accompanying notes are an integral part of these condensed financial statements.
The accompanying notes are an integral part of these condensed financial statements.
WARRIOR MET COAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
NINESIX MONTHS ENDED SEPTEMBERJUNE 30, 2018,2019 (UNAUDITED)
Note 1—Business and Basis of Presentation
Description of the Business
Warrior Met Coal, LLCInc. (the “Company”"Company") was formed on September 3, 2015 by certain Walter Energy, Inc. (“Walter Energy”) lenders under the 2011 Credit Agreement, dated as of April 1, 2011, and the noteholders under the 9.50% Senior Secured Notes due 2019 in connection with the acquisition by the Company of certain core operating assets of Walter Energy (the "Asset Acquisition") under section 363 under Chapter 11 of Title 11 of the U.S. Bankruptcy Code in the Northern District of Alabama, Southern Division (the "Bankruptcy Court"). On January 8, 2016, the Bankruptcy Court approved the Asset Acquisition, which closed on March 31, 2016.
The Company is a U.S. based producer and exporter of metallurgical (“met”)met coal for a diversified customer base of blast furnace steel producers located primarily in Europe, South America and 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.
Corporate Conversion and Initial Public Offering
On April 12, 2017, in connection with the Company’s initial public offering (“IPO”), Warrior Met Coal, LLC filed a certificate of conversion, whereby Warrior Met Coal, LLC effected a corporate conversion from a Delaware limited liability company to a Delaware corporation and changed its name to Warrior Met Coal, Inc. In connection with this corporate conversion, the Company filed a certificate of incorporation. Pursuant to the Company’s certificate of incorporation, the Company is authorized to issue up to 140,000,000 shares of common stock $0.01 par value per share and 10,000,000 shares of preferred stock $0.01 par value per share. All references in the unaudited interim condensed financial statements to the number of shares and per share amounts of common stock have been retroactively recast to reflect the corporate conversion.
On April 19, 2017, the Company completed its IPO whereby the selling stockholders named in the Registration Statement on Form S-1 (File No. 333-216499) sold 16,666,667 shares of common stock at a price to the public of $19.00 per share. The Company did not receive any proceeds from the sale of common stock in the IPO. All of the net proceeds from the IPO were received by the selling stockholders.
The aggregate net proceeds to the selling stockholders in the IPO were $296.9 million, net of underwriting discounts and commissions of $19.8 million. The Company has paid cumulative offering expenses of $15.9 million on behalf of the selling stockholders. Upon the closing of the IPO, 53,442,532 shares of common stock were outstanding. On April 13, 2017, our common stock began trading on the New York Stock Exchange under the ticker symbol "HCC" and on April 19, 2017, we closed our IPO.
Basis of Presentation
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 consolidated financial statements and related notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2018. Operating results for the three and ninesix months ended SeptemberJune 30, 20182019 and SeptemberJune 30, 20172018 are not necessarily indicative of the final results that may be expected for the year ended December 31, 2018.2019. The balance sheet at December 31, 20172018 has been derived from the audited consolidated financial statements for the year ended December 31, 20172018 included in the Company's Annual Report on Form 10-K for the year ended December 31, 20172018 (the "2017"2018 Annual Report").
WARRIOR MET COAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)
NINE MONTHS ENDED SEPTEMBER 30, 2018 (UNAUDITED)
Note 2—Summary of Significant Accounting Policies
Our significant accounting policies are consistent with those disclosed in Note 2 to our audited financial statements included in the 20172018 Annual Report, except for changes related to new accounting pronouncements described below.in "New Accounting Pronouncements".
Cash and Cash Equivalents and Restricted Cash
The following table provides a reconciliation of cash and cash equivalents and restricted cash reported within the Condensed Balance Sheets that sum to the total of the same such amounts shown in the Condensed Statements of Cash Flows (in thousands):
|
| | | | | | | |
| June 30, 2019 | | December 31, 2018 |
Cash and cash equivalents | $ | 119,318 |
| | $ | 205,577 |
|
Restricted cash included in other long-term assets | 827 |
| | 828 |
|
Total cash and cash equivalents and restricted cash included in the Condensed Statements of Cash Flows | $ | 120,145 |
| | $ | 206,405 |
|
|
| | | | | | | |
| September 30, 2018 | | December 31, 2017 |
Cash and cash equivalents | $ | 130,155 |
| | $ | 35,470 |
|
Restricted cash included in other long-term assets | 827 |
| | 794 |
|
Total cash and cash equivalents and restricted cash included in the Condensed Statements of Cash Flows | $ | 130,982 |
| | $ | 36,264 |
|
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 SeptemberJune 30, 2019 and December 31, 2018, restricted cash included in other long-term assets in the Condensed Balance SheetSheets represents amounts invested in certificatecertificates of deposits as financial assurance for post mining reclamation obligations. As of December 31, 2017, 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
WARRIOR MET COAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)
SIX MONTHS ENDED JUNE 30, 2019 (UNAUDITED)
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 SeptemberJune 30, 20182019, short-term investments consisted of $14.3 million in cash and fixed income securities. As of December 31, 2017,2018, the Company’s short-term investments consisted of $17.5 million in Treasury bills with a maturity of six months. TheseThe fixed income securities and Treasury bills were posted as collateral for the self-insured black lung related claims asserted by or on behalf of former employees of Walter Energy, Inc. and its subsidiaries, which were assumed inby the Asset AcquisitionCompany and relate to periods prior to March 31, 2016.
Revenue Recognition
The Company adopted Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers”, as of January 1, 2018, using the modified retrospective approach. The Company will apply the standard to all customer contracts entered into as of the date of initial application. The Company has concluded that the adoption did not change the timing at which the Company has historically recognized revenue nor did it have a material impact on its consolidated financial statements.
For periods prior to January 1, 2018, revenue is recognized when the following criteria have been met: (i) persuasive evidence of an arrangement exists; (ii) the price to the buyer is fixed or determinable; (iii) delivery has occurred; and (iv) collectability is reasonably assured. Delivery is considered to have occurred at the time title and risk of loss transfers to the customer. For coal shipments to domestic customers via rail, delivery occurs when the railcar is loaded. For coal shipments to international customers via ocean vessel, delivery occurs when the vessel is loaded at the Port of Mobile, Alabama. For natural gas sales, delivery occurs when the gas has been transferred to the pipeline.
For periods subsequent to January 1, 2018, revenueRevenue is recognized when performance obligations under the terms of a contract with our customers are satisfied; for all contracts this occurs when control of the promised goods have been transferred to our customers. For coal shipments to domestic customers via rail, control is transferred when the railcar is loaded. For coal
WARRIOR MET COAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)
NINE MONTHS ENDED SEPTEMBER 30, 2018 (UNAUDITED)
shipments to international customers via ocean vessel, control is transferred when the vessel is loaded at the Port of Mobile, Alabama. For natural gas 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 included in all other revenues, as disclosed in Note 12. For the three months ended September 30, 2018, our geographic customer mix was 62% in Europe and 38% in South America. For the three months ended September 30, 2017, our geographic customer mix was 58% in Europe, 22% in South America and 20% in Asia. For the nine months ended September 30, 2018, our geographic customer mix was 57% in Europe, 29% in South America and 14% in Asia. For the nine months ended September 30, 2017, our geographic customer mix was 66% in Europe, 19% in South America and 15% in Asia.14.
Since February 2017, we have had an arrangement with XCoal Energy & Resource ("XCoal") to serve as XCoal's strategic partner for exports of low-volatility HCC. Under this arrangement, XCoal takes title to and markets coal that we would historically have sold on the spot market, in an amount of the greater of (i) 10% of our total production during the applicable term of the arrangement or (ii) 250,000 metric tons. During the three months ended SeptemberJune 30, 20182019 and 2017,2018, XCoal accounted for approximately $12.8$68.1 million, or 5%17.5% of total revenues, and $63.2$42.2 million, or 20%13% of total revenues, respectively. During the ninesix months ended SeptemberJune 30, 20182019 and 2017,2018, XCoal accounted for approximately $157.8$163.0 million, or 16%21.7% of total revenues, and $153.3$144.9 million, or 17%19% of total revenues, respectively.
New Accounting Pronouncements
In February 2016, the Financial
The Company adopted Accounting Standards Board ("FASB"Update (“ASU”) issued ASU No. 2016-02, "Leases (Topic 842)" as of January 1, 2019 using the modified retrospective approach (the "New Leases Standard"). ASU 2016-02 contains accounting guidance that will requireThe New Leases Standard requires a lessee to recognize a right of useright-of-use asset and lease liability on theits balance sheet for all leases, with the exception of short-term leases. Additional qualitative disclosures along with specific quantitative disclosures will also be required. The Company planshas chosen to adopt thisuse its adoption date as its date of initial application. As a result, financial information will not be updated and the disclosures required under the new standard onwill not be provided for dates and periods before January 1, 2019.
The Company made an accounting policy election that leases with an initial term of 12 months or less will remain off its balance sheet and lease payments will instead be recognized in the Condensed Statements of Operations on a straight-line basis over the lease term. Additionally, the Company elected the package of practical expedients for all leases, which permits the Company to forego reassessing expired or existing contracts to determine: whether they are or contain leases, lease classification, and initial direct costs. Management elected the optional transition expedient which allows the Company to continue applying the current policy for accounting for expired or existing land easement contracts that may have not been previously accounted for under ASC Topic 840 Leases. New or modified land easements executed after adoption will be considered under the New Lease Standard. The Company elected the practical expedient as an accounting policy election for all asset classifications, which allows it to account for them as a single lease component, rather than as separate lease and non-lease components.
As the Company’s historical operating leases are primarily short-term rental agreements of less than one year, the Company did not record any additional lease assets or lease liabilities upon adoption of the New Leases Standard. Therefore, the New Leases Standard did not impact the Company's balance sheet or consolidated net income and had no impact on cash flows upon adoption. As of June 30, 2019, the Company has a right-of-use asset of $41.5 million, net of accumulated amortization, a short-term financing lease liability of $8.7 million and a long-term financing lease liability of $31.2 million.
On August 17, 2018, the SEC adopted a final rule that eliminates or amends certain disclosure requirements that were deemed redundant and outdated in light of changes in SEC requirements, U.S. GAAP or changes in technology or the business environment. The rule also requires registrants to include in their interim financial statements a reconciliation of changes in stockholders’ equity in the notes or as a separate statement. The analysis should reconcile the beginning balance to the ending balance of each caption in shareholders’ equity for each period for which an income statement is currently evaluating whetherrequired to be filed. The final
WARRIOR MET COAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)
SIX MONTHS ENDED JUNE 30, 2019 (UNAUDITED)
rule became effective November 5, 2018. The Company has provided a reconciliation for the three and six months ended June 30, 2019 and 2018 in this standard willForm 10-Q. The eliminated or amended disclosures did not have a material impact on the Company's consolidatedCompany’s unaudited condensed financial position and results of operations.statements.
Note 3—Inventories, net
Inventories, net are summarized as follows (in thousands):
|
| | | | | | | |
| June 30, 2019 | | December 31, 2018 |
Coal | $ | 43,907 |
| | $ | 32,854 |
|
Raw materials, parts, supplies and other, net | 25,327 |
| | 23,865 |
|
Total inventories, net | $ | 69,234 |
| | $ | 56,719 |
|
|
| | | | | | | |
| September 30, 2018 | | December 31, 2017 |
Coal | $ | 43,991 |
| | $ | 32,422 |
|
Raw materials, parts, supplies and other, net | 22,780 |
| | 21,872 |
|
Total inventories, net | $ | 66,771 |
| | $ | 54,294 |
|
Note 4—Income Taxes
For the three and ninesix months ended SeptemberJune 30, 2018,2019, the Company estimated its annual effective tax rate and applied this effective tax rate to its year-to-date pretax income at the end of the interim reporting period. The tax effect of unusual or infrequently occurring items, including effects of changes in tax laws or rates and changes in judgment about the realizability of deferred tax assets, are reported in the interim period in which they occur.
For the three and six months ended June 30, 2019, the Company had income tax expense of $33.1 million and $61.0 million, respectively. The income tax expense primarily reflects the Company's utilization of its NOLs. The Company had no income tax expense for the three and ninesix months ended SeptemberJune 30, 2018, due to the utilization of NOLs to offset taxable income. Theincome for which a full valuation allowance was recorded. As a result of various favorable factors further discussed in the 2018 Annual Report, the Company recognizedreleased its valuation allowance against its net deferred income tax benefitassets in the fourth quarter of $37.6 million and $2.9 million for the three and nine months ended September 30, 2017, respectively. The income tax benefit for the three and nine months ended September 30, 2017, was primarily the result of a favorable Internal Revenue Service private letter ruling received during that period that favorably impacted the Company's analysis of its ability to utilize its net operating loss carryforwards for federal income tax purposes.2018.
WARRIOR MET COAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)
NINE MONTHS ENDED SEPTEMBER 30, 2018 (UNAUDITED)
Note 5—Debt
Debt consisted of the following (in thousands):
|
| | | | | | | | | | | | |
| | June 30, 2019 | | December 31, 2018 | | Weighted Average Interest Rate at June 30, 2019 | | Final Maturity |
Senior Secured Notes | | $ | 343,435 |
| | $ | 475,000 |
| | 8% | | 2024 |
Promissory note | | — |
| | 760 |
| |
| | |
Debt discount/premium, net | | (4,581 | ) | | (6,769 | ) | | | | |
Total debt | | 338,854 |
| | 468,991 |
| | | | |
Less: current debt | | — |
| | (760 | ) | | | | |
Total long-term debt | | $ | 338,854 |
| | $ | 468,231 |
| | | | |
|
| | | | | | | | | | | | |
| | September 30, 2018 | | December 31, 2017 | | Weighted Average Interest Rate at September 30, 2018 | | Final Maturity |
Senior secured notes | | $ | 475,000 |
| | $ | 350,000 |
| | 8% | | 2024 |
Promissory note | | 1,512 |
| | 3,725 |
| | 4% | | 2019 |
Debt discount/premium, net | | (8,921 | ) | | (7,812 | ) | | | | |
Total debt | | 467,591 |
| | 345,913 |
| | | | |
Less: current debt | | (1,512 | ) | | (2,965 | ) | | | | |
Total long-term debt | | $ | 466,079 |
| | $ | 342,948 |
| | | | |
The Company's minimum debt repayment schedule, excluding interest, as of September 30, 2018 is as follows (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Payments Due |
| | 2018 | | 2019 | | 2020 | | 2021 | | 2022 | | Thereafter |
Senior secured notes | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $475,000 |
Promissory note | | 752 |
| | 760 |
| | — |
| | — |
| | — |
| | — |
|
Total | | $ | 752 |
| | $ | 760 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 475,000 |
|
Senior Secured Notes
On March 1, 2018,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"“New Notes” and, together with the Original Notes, the "Notes") to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended (the "Securities Act"), and to certain non-U.S. persons in transactions outside the United States in accordance with Regulation S under the Securities Act ("Regulation S"). The New Notes were issued at 103.00% of the aggregate principal amount thereof, plus accrued interest from November 2, 2017.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 (the "Trustee") and priority lien collateral trustee, (the "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 New Notes have not been and will not be registered under the Securities Act, and may not be offered or sold in the United States absent registration or an applicable exemption from the registration requirements of the Securities Act.
In connection with the issuance of the New Notes, the Company incurred transaction costs of approximately $0.5 million and $4.5 million for the three and nine months ended September 30, 2018, respectively, which consists of legal fees and structuring fees, and is included in transaction and other expenses in the Condensed Statements of Operations. In addition, the Company incurred debt issuance costs of approximately $3.7 million, which consists of consent solicitation fees paid to holders of the Existing Notes (as defined below), and is included in long-term debt in the Condensed Balance Sheet.
The New Notes and the $350.0 million in aggregate principal amount of the Company’s existing 8.00% Senior Secured Notes due 2024 (the “Existing Notes” and, together with the New Notes, the "Notes"), which were issued under the Original Indenture on November 2, 2017, rank pari passu in right of payment and constitute a single class of securities for all purposes under the Indenture, including, without limitation, waivers, amendments, redemptions, offers to purchase and collateral matters, and are fungible (except that the New Notes issued pursuant to Regulation S traded separately under different CUSIP/ISIN numbers until 40 days after the issue date, but thereafter any such holders may transfer their New Notes pursuant to Regulation S into the same CUSIP/ISIN numbers as the Existing Notes issued pursuant to Regulation S).
WARRIOR MET COAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)
NINE MONTHS ENDED SEPTEMBER 30, 2018 (UNAUDITED)
The Notes will mature on November 1, 2024 and interest is payable on May 1 and November 1 of each year, commencingyear.
WARRIOR MET COAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)
SIX MONTHS ENDED JUNE 30, 2019 (UNAUDITED)
Offers to Purchase the Notes
On February 21, 2019, the Company commenced an offer to purchase (the “Restricted Payment Offer”), in cash, up to $150,000,000 principal amount of its outstanding Notes, at a repurchase price of 103% of the aggregate principal amount of such Notes, plus accrued and unpaid interest with respect to such Notes to, but not including, the date of repurchase (the “Restricted Payment Repurchase Price”). Concurrently with, but separate from, the Restricted Payment Offer, the Company commenced a cash tender offer (the “Tender Offer” and, together with the Restricted Payment Offer, the “Offers”) to purchase up to $150,000,000 principal amount of the Notes at a repurchase price of 104.25% of the aggregate principal amount of such Notes, plus accrued and unpaid interest to, but not including, the date of repurchase (the “TO Repurchase Price”). The Offers expired on May 1, 2018.March 22, 2019 (the “Expiration Date”).
Restricted Payment Offer
As of 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) 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 usedconsummated the net proceedsRestricted Payment Offer on March 25, 2019.
Accordingly, pursuant to the terms of the offeringIndenture, the Company was permitted to make one or more restricted payments in the form of special dividends to holders of the New Notes, together with cash on handCompany’s common stock and/or repurchases of $225.0 million,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 the April 2019 Special Dividend (as defined below) and intends to use the remainder of the RP Basket to make repurchases under the New 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 special dividendprincipal amount other than in integrals of approximately $350.0$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 or $6.53 per share, to all of its stockholders on a pro rata basis on April 20, 2018 (the "April Special Dividend"). during the six months ended June 30, 2019.
WARRIOR MET COAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)
SIX MONTHS ENDED JUNE 30, 2019 (UNAUDITED)
Note 6—Other Long-Term Liabilities
Other long-term liabilities are summarized as follows (in thousands):
|
| | | | | | | |
| June 30, 2019 | | December 31, 2018 |
Black lung obligations | $ | 25,428 |
| | $ | 25,206 |
|
Other | 759 |
| | 5,510 |
|
Total other long-term liabilities | $ | 26,187 |
| | $ | 30,716 |
|
Note 6—7—Leases
The Company primarily 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 leases. Leases that are for periods of 12 months or less are not recorded on the balance sheet in accordance with the Company's accounting policy election described in Note 2. The Company recognizes lease expense on these agreements on a straight-line basis over the lease term. Additionally, the Company has finance leases for certain mining equipment that expire over various contractual periods. The leases have remaining lease terms of one to five years. These leases do not include an option to renew. Amortization expense for finance leases is included in depreciation and depletion expense.
Supplemental balance sheet information related to leases was as follows (in thousands):
|
| | | | |
| | June 30, 2019 |
Finance lease right-of-use assets, net(1) | | $ | 41,473 |
|
Finance lease liabilities | | |
Current | | 8,659 |
|
Noncurrent | | 31,166 |
|
Total finance lease liabilities | | $ | 39,825 |
|
| | |
Weighted average remaining lease term - finance leases (in months) | | 52.3 |
|
Weighted average discount rate - finance leases(2) | | 5.85 | % |
(1) Finance lease right-of-use assets are recorded net of accumulated amortization of $6.4 million as of June 30, 2019.
(2) When an implicit discount rate is not readily available in a lease, the Company uses its incremental borrowing rate based on information available at the commencement date when determining the present value of lease payments.
WARRIOR MET COAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)
SIX MONTHS ENDED JUNE 30, 2019 (UNAUDITED)
The components of lease expense were as follows (in thousands):
|
| | | | | | | | |
| | For the three months ended June 30, 2019 | | For the six months ended June 30, 2019 |
Operating lease cost(1): | | $ | 63 |
| | $ | 207 |
|
Finance lease cost: | | | | |
Amortization of leased assets | | 3,421 |
| | 5,828 |
|
Interest on lease liabilities | | 395 |
| | 408 |
|
Net lease cost | | $ | 3,879 |
| | $ | 6,443 |
|
(1) Includes leases that are for periods of 12 months or less.
Maturities of lease liabilities were as follows (in thousands):
|
| | | | |
| | Finance Leases(1) |
2019 | | $ | 6,495 |
|
2020 | | 13,043 |
|
2021 | | 8,558 |
|
2022 | | 8,558 |
|
2023 | | 8,558 |
|
Thereafter | | 842 |
|
Total | | 46,054 |
|
Less: amount representing interest | | (6,229 | ) |
Present value of lease liabilities | | $ | 39,825 |
|
(1) Finance lease payments exclude $1.1M 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 June 30, 2019 | | For the six months ended June 30, 2019 |
Cash paid for amounts included in the measurement of lease liabilities: | | | | |
Operating cash flows from finance leases | | $ | 395 |
|
| $ | 408 |
|
Financing cash flows from finance leases | | $ | 5,697 |
| | $ | 7,654 |
|
Non-cash right-of-use assets obtained in exchange for lease obligations: | | | | |
Finance leases | | $ | 38,216 |
| | $ | 40,302 |
|
As of June 30, 2019, the Company had additional commitments for finance leases, primarily for mining equipment, that have not yet commenced of $1.1 million. These finance leases will commence between fiscal year 2019 and 2021 with lease terms of one to two years.
WARRIOR MET COAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)
SIX MONTHS ENDED JUNE 30, 2019 (UNAUDITED)
Note 8—Net Income per Share
Basic and diluted net income per share was calculated as follows (in thousands, except per share data):
|
| | | | | | | | | | | | | | | |
| For the three months ended June 30, | | For the six months ended June 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
Numerator: | | | | | | | |
Net income | $ | 125,481 |
| | $ | 91,312 |
| | $ | 235,928 |
| | $ | 270,006 |
|
Denominator: | | | | | | | |
Weighted-average shares used to compute net income per share—basic | 51,553 |
| | 53,053 |
| | 51,532 |
| | 52,976 |
|
Dilutive restrictive stock awards | 128 |
| | 26 |
| | 109 |
| | 31 |
|
Weighted-average shares used to compute net income per share—diluted | 51,681 |
| | 53,079 |
| | 51,641 |
| | 53,007 |
|
Net income per share—basic and diluted | $ | 2.43 |
| | $ | 1.72 |
| | $ | 4.58 |
| | $ | 5.10 |
|
Net income per share—diluted | $ | 2.43 |
| | $ | 1.72 |
| | $ | 4.57 |
| | $ | 5.09 |
|
|
| | | | | | | | | | | | | | | |
| For the three months ended September 30, | | For the nine months ended September 30, |
| 2018 | | 2017 | | 2018 | | 2017 |
Numerator: | | | | | | | |
Net income | $ | 52,591 |
| | $ | 119,717 |
| | $ | 322,597 |
| | $ | 357,890 |
|
Denominator: | | | | | | | |
Weighted-average shares used to compute net income per share—basic | 52,707 |
| | 52,777 |
| | 52,916 |
| | 52,727 |
|
Dilutive restrictive stock awards | 1 |
| | — |
| | 29 |
| | — |
|
Weighted-average shares used to compute net income per share—diluted | 52,708 |
| | 52,777 |
| | 52,945 |
| | 52,727 |
|
Net income per share—basic | $ | 1.00 |
| | $ | 2.27 |
| | $ | 6.10 |
| | $ | 6.79 |
|
Net income per share—diluted | $ | 1.00 |
| | $ | 2.27 |
| | $ | 6.09 |
| | $ | 6.79 |
|
2017 Equity PlanOn March 5, 2018,February 8, 2019, the Company awarded 186,916306,314 restricted stock unit awards under the Company's 2017 Equity Incentive Plan (the "2017 Equity Plan"). These awards have certain service-based, performance-based and market-based vesting conditions, andas 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 $0.6$0.9 million and $1.4 million in stock compensation expense associated with these awards for the three and ninesix months ended SeptemberJune 30, 2018,2019, respectively.
Additionally, the Company awarded $1.5 million of restricted stock unit awards under the 2017 Equity Plan that can be settled in shares or in cash at the election of employees. These awards have certain service-based and performance-based vesting conditions and can be earned no later than December 31, 2021. If the Company were to settle these awards in shares these awards would represent 57,427 shares based on the Company's closing share price on June 30, 2019. The Company recognized approximately $129 thousand and $214 thousand in stock compensation expense associated with these awards for the three and six months ended June 30, 2019, respectively.
As of SeptemberJune 30, 2018, neither2019, there were 160,903 restricted stock unit awards for which the service, performance nor market-basedservice-based vesting conditions for these awards were not met as of the measurement date. As such, these awards were excluded from basic earnings per share. These awards had a 43,770 and 32,732 share impact on dilutive weighted average shares for the three and six months ended June 30, 2019, respectively. As of June 30, 2019, there were 272,953 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 have beenwere excluded from basic and diluted earnings per share.
For the 57,427 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 10,042 and 7,329 share impact on dilutive weighted average shares for the three and six months ended June 30, 2019.
As of SeptemberJune 30, 2018, there were 150,715 shares of common stock issued and outstanding under the Company's 2016 Equity Incentive Plan (the "2016 Equity Plan") to certain directors and employees, for which the service vesting condition was not met as of the measurement date. During the second quarter of 2018, certain stockholders of the Company sold in two separate transactions an aggregate of 13,000,000 shares of the Company's common stock in public secondary offerings (see Note 9). In connection with the first of these Secondary Equity Offerings (as defined in Note 9), a performance-based vesting condition was met resulting in approximately $3.6 million of incremental stock compensation expense during the nine months ended September 30, 2018.
As of September 30, 2018,2019, there were 43,580 shares of our 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 our common stock contingently issuable upon the settlement of a vested restricted stock unit award under our 2017 Equity Plan.Plan, as applicable. The settlement date for these awards is the earlier of a change in control as described in our 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.
WARRIOR MET COAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)
SIX MONTHS ENDED JUNE 30, 2019 (UNAUDITED)
2016 Equity Plan
As of SeptemberJune 30, 2018,2019, there were 99,895 vested shares of common98,216 restricted stock and 192,184 unvestedunit awards issuedgranted under the 2017Company's 2016 Equity Incentive Plan (the "2016 Equity Plan") to certain directors and employees.employees, for which the service-based vesting conditions for these awards were not met as of the measurement date. As such, these awards were excluded from basic earnings per share. These awards had a 73,363 and 69,190 share impact on dilutive weighted average shares for the three and six months ended June 30, 2019, respectively.
Note 7—9—Related Party Transactions
In connection with the Asset Acquisition, theThe Company acquiredowns a 50% interest in Black Warrior Methane (“BWM”) and Black Warrior Transmission (“BWT”), which are accounted for under the proportionate consolidation method and equity method, respectively. The Company has granted the rights to produce and sell methane gas from its coal mines to BWM and
WARRIOR MET COAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)
NINE MONTHS ENDED SEPTEMBER 30, 2018 (UNAUDITED)
BWT. The Company’s net investments in, advances to/from BWT and equity in earnings or loss of BWT are not material to the 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 $0.8$0.4 million and $2.3$0.5 million, respectively, for the three and ninesix months ended SeptemberJune 30, 2018, respectively,2019 and $0.2$0.7 million and $1.0$1.5 million, respectively, for the three and ninesix months ended SeptemberJune 30, 2017, respectively.2018.
Note 8—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 SeptemberJune 30, 20182019 and December 31, 2017,2018, there were no accruals for environmental matters other than asset retirement obligations for mine reclamation.
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 SeptemberJune 30, 20182019 and December 31, 2017,2018, there were no items accrued for miscellaneous litigation.
Walter Canada Settlement Proceeds
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 the Company’s acquisition of certain core operating assets of Walter Energy, the Company 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 the Company in the Walter Canada CCAA proceedings. Walter Energy deemed these receivables to be impaired for the year ended December 31, 2015 and the Company did not assign any value to these receivables in acquisition accounting as collectability was deemed remote. In May 2019, the Company received approximately $17.5 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.
WARRIOR MET COAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)
SIX MONTHS ENDED JUNE 30, 2019 (UNAUDITED)
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 SeptemberJune 30, 20182019 and December 31, 2017,2018, the Company had no liability recorded for minimum throughput requirements.
Royalty and Lease Obligations
The Company’s leases are primarily for mining equipment and automobiles. At September 30, 2018 and December 31, 2017, the Company had no future minimum payments due under non-cancellable operating leases.
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 $19.9$29.3 million and $74.1$56.0 million for the three and ninesix months ended SeptemberJune 30, 2018,2019, respectively, and $22.3$23.3 million and $74.5$54.2 million for the three and ninesix months ended SeptemberJune 30, 2017,2018, respectively.
Note 9—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.
On March 31, 2017, the board of managers declared a cash distribution payable to holders of the Company's then outstanding Class A Units, Class B Units and Class C Units as of March 27, 2017, resulting in distributions to such holders in
WARRIOR MET COAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)
NINE MONTHS ENDED SEPTEMBER 30, 2018 (UNAUDITED)
the aggregate amount of $190.0 million (the “March Special Distribution”). In connection with the corporate conversion, 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 March Special Distribution with respect to such Restricted Shares was not paid but held in trust pending their vesting. As of September 30, 2018, approximately $5.3 million is held in the trust and is included within other long-term assets in the accompanying Condensed Balance Sheets.
New Stock Repurchase Program
On May 2, 2018,March 26, 2019, the BoardCompany's board of directors (the "Board") approved athe Company's second stock repurchase program (the “Stock“New Stock Repurchase Program”) that authorizes repurchases of up to an aggregate of $40.0$70.0 million of the Company's outstanding common stock. The Company fully exhausted its previous stock repurchase program (the "First Stock Repurchase Program") of $40.0 million of its outstanding common stock. The New Stock Repurchase Program does not require the Company to repurchase a specific number of shares or have an expiration date. The New Stock Repurchase Program may be suspended or discontinued by the Board at any time without prior notice.
Under the New Stock Repurchase Program, the Company may repurchase shares of its common stock from time to time, in amounts, 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 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. The Company intends to fund repurchases under the New Stock Repurchase Program from cash on hand and/or other sources of liquidity.
Secondary Equity OfferingsRegular Quarterly Dividend
On April 23, 2019, the Board declared a regular quarterly cash dividend of $0.05 per share, totaling approximately $2.6 million, which was paid on May 10, 2018 certain2019 to stockholders of the Company sold 8,000,000 sharesrecord as of the Company's common stock inclose of business on May 3, 2019.
April 2019 Special Dividend
On April 23, 2019, the Board declared a public secondary offering at a pricespecial cash dividend of $4.41 per share (the "April 2019 Special Dividend"), totaling approximately $230.0 million, which was paid on May 14, 2019 to the underwriterstockholders of $24.20 per share. The Company did not receive anyrecord as of the proceeds from this offering. In connection with this offering, the Company repurchased 500,000 sharesclose of common stock under the Stock Repurchase Program, funded with cashbusiness on hand for the aggregate amount of $12.1 million (the "Stock Repurchase"). The shares repurchased by the Company in the Stock Repurchase are reflected as Treasury Stock on the Condensed Balance Sheets.May 6, 2019.
On June 14, 2018, certain stockholders of the Company sold 5,000,000 shares of the Company's common stock in a public secondary offering at a price to the underwriter of $28.35 per share. The Company did not receive any of the proceeds from the offering.
16
On August 8, 2018, certain stockholders of the Company sold 2,204,806 shares of the Company's common stock in a public secondary offering (the "August Equity Offering") at a price to the underwriter of $25.40 per share. The Company did not receive any of the proceeds from the offering.
We refer to these offerings herein collectively as the "Secondary Equity Offerings." In connection with the Secondary Equity Offerings, we incurred transaction costs of approximately $2.8 million and $3.0 million for the three and nine months ended September 30, 2018, respectively.
WARRIOR MET COAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)
SIX MONTHS ENDED JUNE 30, 2019 (UNAUDITED)
Note 10—12—Derivative Instruments
The Company enters into natural gas swap contracts from time to time to hedge the exposure to variability in expected future cash flows associated with the fluctuations in the price of natural gas related to the Company’s forecasted sales. As of SeptemberJune 30, 2019, the Company had no natural gas swap contracts outstanding. As of December 31, 2018, the Company had natural gas swap contracts outstanding with notional amounts totaling 2,100 million British thermal units maturingthat matured in the fourth quarter of 2018 and the first quarter of 2019. As of December 31, 2017, the Company had natural gas swap contracts outstanding with notional amounts totaling 8,400 million British thermal units maturing in the fourth quarter of 2018.
The Company’s natural gas swap contracts economically hedge certain risk but are not designated as hedges for financial reporting purposes. All changes in the fair value of these derivative instruments are recorded as other revenues in the Condensed Statements of Operations. The Company records all derivative instruments at fair value and had no liability as of June 30, 2019 and a liability of $0.1 thousand as of September 30, 2018 in other current liabilities and an asset of $1.7$0.2 million as of December 31, 20172018 included in prepaid expensesother current liabilities in the accompanying Condensed Balance Sheets.
WARRIOR MET COAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)
NINE MONTHS ENDED SEPTEMBER 30, 2018 (UNAUDITED)
Note 11—13—Fair Value of Financial Instruments
The Company had no assets or any other liabilities measured at fair value on a recurring basis as of June 30, 2019. The following table presents information about the Company’s financial liabilities measured at fair value on a recurring basis as of December 31, 2018 and indicateindicates the level of the fair value hierarchy utilized to determine such fair valuesvalue (in thousands):
|
| | | | | | | | | | | | | | | | |
|
| Fair Value Measurements as of December 31, 2018 Using: |
|
| Level 1 |
| Level 2 |
| Level 3 |
| Total |
Liabilities: |
|
|
|
|
|
|
|
|
Natural gas swap contracts |
| $ | — |
|
| $ | 178 |
|
| $ | — |
|
| $ | 178 |
|
|
| | | | | | | | | | | | | | | | |
| | Fair Value Measurements as of September 30, 2018 Using: |
| | Level 1 | | Level 2 | | Level 3 | | Total |
Liabilities: | | | | | | | | |
Natural gas swap contracts | | $ | — |
| | $ | 13 |
| | $ | — |
| | $ | 13 |
|
|
| | | | | | | | | | | | | | | | |
|
| Fair Value Measurements as of December 31, 2017 Using: |
|
| Level 1 |
| Level 2 |
| Level 3 |
| Total |
Assets: |
|
|
|
|
|
|
|
|
Natural gas swap contracts |
| $ | — |
|
| $ | 1,644 |
|
| $ | — |
|
| $ | 1,644 |
|
During the three and nine months ended September 30, 2018, there were no transfers between Level 1, Level 2 and Level 3. The Company uses quoted dealer prices for similar contracts in active over-the-counter markets for determining fair value of Level 2 liabilities. There were no changes to the valuation techniques used to measure liability fair values on a recurring basis during the three and nine months ended September 30, 2018.
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 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 debt is carried at cost. As of SeptemberJune 30, 2018,2019, there were no borrowings outstanding under the ABL Facility, with $95.4$116.1 million available, net of outstanding letters of credit of $4.6$9.0 million. There were no borrowings or outstanding under the ABL Facility and there were $4.6 million of letters of credit issued and outstanding under the ABL Facility as of December 31, 2017.2018. The estimated fair value of the Notes is approximately $489.3$359.7 million based upon observable market data (Level 2). The carrying value of the Company's outstanding promissory note approximates its fair value.
WARRIOR MET COAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)
NINE MONTHS ENDED SEPTEMBER 30, 2018 (UNAUDITED)
Note 12—14—Segment Information
The Company identifies a business as an operating segment if: (i) it engages in business activities from which it may earn revenues and incur expenses; (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) it has available discrete financial information. The Company has determined that its two 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) nature of products and services; (ii) nature of production processes; (iii) type or class of customer for their products and services; (iv) methods used to distribute the products or provide services; and (v) if applicable, the nature of the regulatory environment.
The Company has determined that the two operating segments are similar in both quantitative and qualitative characteristics and thus the two operating segments have been aggregated into one 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
WARRIOR MET COAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)
SIX MONTHS ENDED JUNE 30, 2019 (UNAUDITED)
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, transactions costs, interest expense, and income tax expense by segment.
The following tables include reconciliations of segment information to consolidated amounts (in thousands):
|
| | | | | | | | | | | | | | | |
| For the three months ended June 30, | | For the six months ended June 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
Revenues | | | | | | | |
Mining | $ | 387,429 |
| | $ | 315,045 |
| | $ | 757,110 |
| | $ | 727,924 |
|
All other | 10,184 |
| | 7,510 |
| | 18,793 |
| | 16,419 |
|
Total revenues | $ | 397,613 |
| | $ | 322,555 |
| | $ | 775,903 |
| | $ | 744,343 |
|
|
| | | | | | | | | | | | | | | |
| For the three months ended September 30, | | For the nine months ended September 30, |
| 2018 | | 2017 | | 2018 | | 2017 |
Revenues | | | | | | | |
Mining | $ | 264,908 |
| | $ | 302,958 |
| | $ | 992,832 |
| | $ | 895,802 |
|
All other | 8,396 |
| | 8,997 |
| | 24,815 |
| | 33,487 |
|
Total revenues | $ | 273,304 |
| | $ | 311,955 |
| | $ | 1,017,647 |
| | $ | 929,289 |
|
|
| | | | | | | | | | | | | | |
| For the three months ended June 30, | | For the six months ended June 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
Capital Expenditures | | | | | | | |
Mining | 26,879 |
| | $ | 32,402 |
| | $ | 50,089 |
| | $ | 53,498 |
|
All other | 826 |
| | 475 |
| | 2,011 |
| | 1,921 |
|
Total capital expenditures | 27,705 |
| | $ | 32,877 |
| | $ | 52,100 |
| | $ | 55,419 |
|
|
| | | | | | | | | | | | | | |
| For the three months ended September 30, | | For the nine months ended September 30, |
| 2018 | | 2017 | | 2018 | | 2017 |
Capital Expenditures | | | | | | | |
Mining | 22,924 |
| | $ | 34,125 |
| | $ | 76,422 |
| | $ | 60,647 |
|
All other | 1,236 |
| | 283 |
| | 3,157 |
| | 2,024 |
|
Total capital expenditures | 24,160 |
| | $ | 34,408 |
| | $ | 79,579 |
| | $ | 62,671 |
|
WARRIOR MET COAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)
NINE MONTHS ENDED SEPTEMBER 30, 2018 (UNAUDITED)
The Company evaluates the performance of its segment based on Segment Adjusted EBITDA, which is defined as net income 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 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, which is its most directly comparable financial measure calculated and presented in accordance with GAAP (in thousands):
|
| | | | | | | | | | | | | | | |
| For the three months ended June 30, | | For the six months ended June 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
Segment Adjusted EBITDA | $ | 182,241 |
| | $ | 136,502 |
| | $ | 369,294 |
| | $ | 358,705 |
|
Other revenues | 10,184 |
| | 7,510 |
| | 18,793 |
| | 16,419 |
|
Cost of other revenues | (8,019 | ) | | (7,338 | ) | | (15,764 | ) | | (15,122 | ) |
Depreciation and depletion | (25,678 | ) | | (21,127 | ) | | (47,911 | ) | | (45,679 | ) |
Selling, general and administrative | (10,783 | ) | | (13,465 | ) | | (19,688 | ) | | (21,699 | ) |
Transaction and other expenses | — |
| | (986 | ) | | — |
| | (4,274 | ) |
Loss on early extinguishment of debt | — |
| | — |
| | (9,756 | ) | | — |
|
Other income | 17,543 |
| | — |
| | 17,543 |
| | — |
|
Interest expense, net | (6,951 | ) | | (9,784 | ) | | (15,543 | ) | | (18,344 | ) |
Income tax expense | (33,056 | ) | | — |
| | (61,040 | ) | | — |
|
Net income | $ | 125,481 |
| | $ | 91,312 |
| | $ | 235,928 |
| | $ | 270,006 |
|
|
| | | | | | | | | | | | | | | |
| For the three months ended September 30, | | For the nine months ended September 30, |
| 2018 | | 2017 | | 2018 | | 2017 |
Segment Adjusted EBITDA | $ | 97,720 |
| | $ | 113,394 |
| | $ | 456,425 |
|
| $ | 439,942 |
|
Other revenues | 8,396 |
| | 8,997 |
| | 24,815 |
| | 33,487 |
|
Cost of other revenues | (6,704 | ) | | (6,985 | ) | | (21,826 | ) | | (22,959 | ) |
Depreciation and depletion | (26,071 | ) | | (23,393 | ) | | (71,750 | ) | | (57,625 | ) |
Selling, general and administrative | (7,357 | ) | | (9,243 | ) | | (29,056 | ) | | (23,073 | ) |
Transaction and other expenses | (3,265 | ) | | — |
| | (7,539 | ) | | (12,873 | ) |
Interest expense, net | (10,128 | ) | | (640 | ) | | (28,472 | ) | | (1,890 | ) |
Income tax benefit | — |
| | 37,587 |
| | — |
| | 2,881 |
|
Net income | $ | 52,591 |
| | $ | 119,717 |
| | $ | 322,597 |
| | $ | 357,890 |
|
WARRIOR MET COAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)
SIX MONTHS ENDED JUNE 30, 2019 (UNAUDITED)
Note 13—15—Subsequent Events
Regular Quarterly Dividend
On OctoberJuly 23, 2018,2019, the Board declared a regular quarterly cash dividend of $0.05 per share, totaling approximately $2.7$2.6 million, which will be paid on NovemberAugust 9, 20182019 to stockholders of record as of the close of business on NovemberAugust 2, 2018.2019.
On October 15, 2018, the Company entered into an Amended and Restated Asset-Based Revolving Credit Agreement, by and among the Company and certain of its subsidiaries, as borrowers, the guarantors party thereto, Citibank, N.A., as administrative agent and collateral agent (the “Agent”), the lenders and letter of credit issuers party thereto and Citigroup Global Markets Inc. and Credit Suisse Securities (USA) LLC as joint lead arrangers and joint book runners which amends and restates in its entirety the existing ABL Facility and, among other things (i) increases the aggregate commitments available to be borrowed under the ABL Facility by $25.0 million to $125.0 million; (ii) extends the maturity date of the ABL Facility to October 15, 2023; (iii) decreases the applicable interest rate margins with respect to the loans and the applicable fees in connection with the issuance of letters of credit; and (iv) amends certain covenants and other term and provisions.
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 ninesix months ended SeptemberJune 30, 20182019 and SeptemberJune 30, 2017.2018. 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 Form 10-Q and the audited financial statements for the year ended December 31, 20172018 included in the 2017Company's Annual Report.Report on Form 10-K for the year ended December 31, 2018 (the "2018 Annual Report"). Some of the information contained in this discussion and analysis or set forth elsewhere in this 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, 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 producer and exporter of premium met coal operating two highly productive underground mines in Alabama.
As of December 31, 2017,2018, Mine No. 4 and Mine No. 7, our two operating mines, had approximately 110.0108.3 million metric tons of recoverable reserves and our undeveloped Blue Creek Energy Mine ("Blue Creek") contained 103.0 million metric tons of recoverable reserves. Our hard coking coal (“HCC”), mined from the Southern Appalachian region of the United States, is characterized by low-to-medium volatile matter (“VM”) and high coke strength after reaction (“CSR”). These qualities make our coal ideally suited as a coking coal for the manufacture of steel. As a result of our high quality coal, our realized price has historically been in line with, or at a slight discount to,approximated the Australian premium low-volatilityPlatts Premium Low Volatility ("LV") HCC benchmark (“Australian HCC Benchmark”Free-On-Board ("FOB") Australia Index Price (the "Platts Index"). Coal from Mine No. 7 is classified as a premium LV HCC and coal from Mine No. 4 is classified as premium LV to mid-volatility ("MV") HCC. In contrast, coal produced in the Central Appalachian region of the United States is typically characterized by medium-to-high VM and a CSR that is below the requirements of the Australian HCC Benchmark.
The Australian HCC Benchmark pricing methodology was replaced in the second quarter of 2017 by a new average index pricing methodology, which varies by supplier, but is based on the three-month average of the Platts premium low-volatile (“low-vol”) index, the Steel Index (“TSI”) premium coking coal index and the Argus Index on a one-month lag during each quarter (the "Australian LV Index"). In the first quarter of 2018, we changed our gross price realization calculation to no longer be based on the Australian LV Index. Due to the inherent nature of the Australian LV Index, specifically the fact that this index is on a one-month lag basis and did not closely correlate with the timing of our shipments, since January 2018, we began comparing our price realization to the Platts Premium LV Free-On-Board ("FOB") Australia Index price (the "Platts Index"). Our gross price realization now 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 price.
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.
Factors Affecting the Comparability of our Financial Statements
Corporate Conversion and Initial Public Offering
On April 12, 2017, in connection with the IPO, Warrior Met Coal, LLC filed a certificate of conversion, whereby Warrior Met Coal, LLC effected a corporate conversion from a Delaware limited liability company to a Delaware corporation and changed its name to Warrior Met Coal, Inc. As part of the corporate conversion, holders of Class A, Class B Units (which included the Class B Units which had converted into Class A Units) and Class C Units of Warrior Met Coal, LLC received
shares of our common stock for each unit held immediately prior to the corporate conversion using an approximate 13.9459-to-one conversion ratio. In connection with this corporate conversion, we filed a certificate of incorporation. Pursuant to our certificate of incorporation, we are 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.
On April 19, 2017, we completed our IPO whereby the selling stockholders named in the Registration Statement on Form S-1 sold 16,666,667 shares of common stock at a price to the public of $19.00 per share. We did not receive any proceeds from the sale of common stock in the IPO. All of the net proceeds from the IPO were received by the selling stockholders.
The aggregate net proceeds to the selling stockholders in the IPO were $296.9 million, net of underwriting discounts and commissions of $19.8 million. We paid the offering expenses of $15.9 million on behalf of the selling stockholders. Upon the closing of the IPO, 53,442,532 shares of common stock were outstanding. On April 13, 2017, our common stock began trading on the New York Stock Exchange under the ticker symbol "HCC" and on April 19, 2017, we closed our IPO.
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.
| | | For the three months ended September 30, | | For the nine months ended September 30, | For the three months ended June 30, | | For the six months ended June 30, |
| 2018 | | 2017 | | 2018 | | 2017 | 2019 | | 2018 | | 2019 | | 2018 |
(in thousands) |
|
|
Segment Adjusted EBITDA | $ | 97,720 |
| | $ | 113,394 |
| | $ | 456,425 |
| | $ | 439,942 |
| $ | 182,241 |
| | $ | 136,502 |
| | $ | 369,294 |
| | $ | 358,705 |
|
Metric tons sold | 1,513 |
| | 1,908 |
| | 5,143 |
| | 4,692 |
| 2,032 |
| | 1,711 |
| | 3,933 |
| | 3,631 |
|
Metric tons produced | 1,650 |
| | 1,470 |
| | 5,303 |
| | 4,665 |
| 1,992 |
| | 1,750 |
| | 4,076 |
| | 3,654 |
|
Gross price realization(1) | 97 | % | | 85 | % | | 98 | % | | 108 | % | 97 | % | | 100 | % | | 97 | % | | 99 | % |
Average selling price per metric ton | $ | 175.09 |
| | $ | 158.78 |
| | $ | 193.05 |
| | $ | 190.92 |
| $ | 190.66 |
| | $ | 184.13 |
| | $ | 192.50 |
| | $ | 200.47 |
|
Cash cost of sales per metric ton | $ | 109.99 |
| | $ | 99.10 |
| | $ | 103.78 |
| | $ | 96.85 |
| $ | 100.64 |
| | $ | 103.51 |
| | $ | 98.26 |
| | $ | 101.12 |
|
Adjusted EBITDA | $ | 94,129 |
| | $ | 107,336 |
| | $ | 439,421 |
| | $ | 431,391 |
| $ | 175,890 |
| | $ | 128,845 |
| | $ | 356,908 |
| | $ | 345,292 |
|
(1) For the three and ninesix months ended SeptemberJune 30, 2019 and 2018, 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. For the three and nine months ended September 30, 2017, gross price realization represents gross sales, excluding demurrage and other charges, divided by tons sold as a percentage of the Australian LV Index.
Segment Adjusted EBITDA
We define Segment Adjusted EBITDA as net income 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 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 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 daily index averages or a quarterly basis.averages. The volume of coal we sell is also a function of the pricing environment in the international met coal markets and the amounts of LV and MV coal that we sell. We evaluate the price we receive for our coal on two primary metrics: first, our gross price realization and second, our average net selling price per metric ton.
In the first quarter of 2018, we changed our gross price realization calculation to no longer be based on the quarterly Australian LV Index average due to this index being on a one-month lag basis and not closely correlating with the timing of our shipments. Our gross price realization now 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 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 and due to the fact that many of our met coal supply agreements are based on a variety of indices.indices such as the Platts Index and TSI Index and due to the timing of shipments.
Our average net selling price per metric ton represents our coal net sales revenue divided by total metric tons of coal sold. In addition, our average net selling price per metric ton is net of the previously mentioned demurrage and 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-board at the Port of Mobile. 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 costs 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-board at the Port of Mobile. 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.
| | | For the three months ended September 30, | | For the nine months ended September 30, | For the three months ended June 30, | | For the six months ended June 30, |
| 2018 | | 2017 | | 2018 | | 2017 | 2019 | | 2018 | | 2019 | | 2018 |
(in thousands) |
| | |
| | |
Cost of sales | $ | 167,188 |
| | $ | 189,564 |
| | $ | 536,407 |
| | $ | 455,860 |
| $ | 205,188 |
| | $ | 178,543 |
| | $ | 387,816 |
| | $ | 369,219 |
|
Asset retirement obligation accretion | (560 | ) | | (441 | ) | | (1,680 | ) | | (1,324 | ) | (373 | ) | | (560 | ) | | (746 | ) | | (1,120 | ) |
Stock compensation expense | (218 | ) | | (39 | ) | | (1,011 | ) | | (114 | ) | (308 | ) | | (879 | ) | | (627 | ) | | (946 | ) |
Cash cost of sales | $ | 166,410 |
| | $ | 189,084 |
| | $ | 533,716 |
| | $ | 454,422 |
| $ | 204,507 |
| | $ | 177,104 |
| | $ | 386,443 |
| | $ | 367,153 |
|
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. 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.