NOTES TO CONDENSED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2020 (UNAUDITED)
Note 1—Business and Basis of Presentation
Description of the Business
Warrior Met Coal, Inc. (the "Company") is a U.S. based environmentally and socially minded supplier to the global steel industry. The Company is 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. 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 months ended March 31, 2020 are not necessarily indicative of the final results that may be expected for the year ended December 31, 2020. The balance sheet at December 31, 2019 has been derived from the audited financial statements for the year ended December 31, 2019 included in the 2019 Annual Report.
Note 2—Summary of Significant Accounting Policies
The Company's significant accounting policies are consistent with those disclosed in Note 2 to its audited financial statements included in the 2019 Annual Report, except for changes related to new accounting pronouncements described in "New Accounting Pronouncements."
Cash and Cash Equivalents
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.
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 are those securities that management has the intent and ability to hold to maturity.
As of March 31, 2020, short-term investments consisted of $8.5 million in cash and fixed income securities. As of December 31, 2019, the Company’s short-term investments consisted of $14.7 million in cash 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 by the Company and relate to periods prior to March 31, 2016.
Revenue Recognition
Revenue is recognized when performance obligations under the terms of a contract with the Company's customers are satisfied; for all contracts this occurs when control of the promised goods have been transferred to its customers. For coal shipments to domestic customers via rail, control is 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)
THREE MONTHS ENDED MARCH 31, 2020 (UNAUDITED)
sales, control is transferred when the gas has been transferred to the pipeline. Revenue is disaggregated between coal sales within the Company's mining segment and natural gas sales which is included in all other revenues, as disclosed in Note 13.
Since February 2017, the Company has had an arrangement with XCoal Energy & Resource ("XCoal") to serve as XCoal's strategic partner for exports of low-volatility hard coking coal. Under this arrangement, XCoal takes title to and markets coal that the Company would historically have sold on the spot market, in an amount of the greater of (i) 10% of the Company's total production during the applicable term of the arrangement or (ii) 250,000 metric tons. During the three months ended March 31, 2020 and 2019, XCoal accounted for approximately $44.3 million, or 19.9% of total revenues, and $94.9 million, or 25.8% of total revenues, respectively.
Trade Accounts Receivable and Allowance for Credit Losses
Trade accounts receivable represent customer obligations that are derived from revenue recognized from contracts with customers. Credit is extended based on an evaluation of the individual customer's financial condition. The Company maintains trade credit insurance on the majority of its customers and the geographic regions of coal shipments to these customers. In some instances, the Company requires letters of credit, cash collateral or prepayments from its customers on or before shipment to mitigate the risk of loss. These efforts have consistently resulted in the Company recognizing no historical credit losses. The Company also has never had to have a claim against its trade credit insurance policy.
In order to estimate the 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 Company calculates an expected credit loss rate based on the Company’s historical credit loss rate, the risk characteristics of our customers, and the current metallurgical coal and steel market environments. As of March 31, 2020, the estimated allowance for credit losses was immaterial and did not have a material impact on the Company's financial statements.
New Accounting Pronouncements
The Company adopted Accounting Standards Update 2016-13, "Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments" as of January 1, 2020 using the modified retrospective approach. The 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 financial asset. The adoption of the new standard did not have a material impact on the Company's financial statements, including accounting policies, processes and systems.
Note 3—Inventories, 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 novel coronavirus disease 2019 ("COVID-19") and its impact on the Company's annual guidance. For the three months ended March 31, 2020, the Company had income tax expense of $3.2 million. The income tax expense represents a noncash expense as the Company continues to utilize its NOLs. The Company had income tax expense of $28.0 million for the three months ended March 31, 2019.
WARRIOR MET COAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)
THREE MONTHS ENDED MARCH 31, 2020 (UNAUDITED)
On March 27, 2020, the President of the United States signed and enacted into law the Coronavirus Aid, Relief and Economic Security Act (the "CARES Act"). The CARES Act, among other things, provides temporary relief from certain aspects of the Tax Cuts and Jobs Act of 2017 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 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, the Company 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 the Company now expects to receive these refunds this year. The Company now expects to receive approximately $24.3 million in 2020 for refunds of AMT credits. The Company is continuing to evaluate the impact of the CARES Act on its business, financial results and disclosures.
Note 5—Debt
Debt consisted of the following (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
|
|
|
|
|
|
Senior Secured Notes
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
On February 21, 2019, the Company commenced an offer to purchase (the “Restricted Payment Offer”), in cash, up to $150,000,000 principal amount of its outstanding Notes, at a repurchase price of 103% of the aggregate principal amount of such Notes, plus accrued and unpaid interest with respect to such Notes to, but not including, the date of repurchase (the “Restricted Payment Repurchase Price”). Concurrently with, but separate from, the Restricted Payment Offer, the Company commenced a cash tender offer (the “Tender Offer” and, together with the Restricted Payment Offer, the “Offers”) to purchase up to $150,000,000 principal amount of the Notes at a repurchase price of 104.25% of the aggregate principal amount of such Notes, plus accrued and unpaid interest to, but not including, the date of repurchase (the “TO Repurchase Price”). The Offers expired on March 22, 2019 (the “Expiration Date”).
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:
WARRIOR MET COAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)
THREE MONTHS ENDED MARCH 31, 2020 (UNAUDITED)
(1) an automatic pro ration factor of 31.5789% was applied to the $1,900,000 aggregate principal amount of the Notes that were validly tendered and not validly withdrawn in the Restricted Payment Offer (rounded down to avoid the purchase of Notes in a principal amount other than in integrals of $1,000), which resulted in $599,000 aggregate principal amount of the Notes (the “RP Pro-Rated Tendered Notes”);
(2) the Company accepted all $599,000 aggregate principal amount of the RP Pro-Rated Tendered Notes for payment of the Restricted Payment Repurchase Price in cash; and
(3) the remaining balance of $1,301,000 aggregate principal amount of the Notes tendered that were not RP Pro-Rated Tendered Notes were not accepted for payment and were returned to the tendering holder of the Notes.
The Company consummated the Restricted Payment Offer on March 25, 2019.
Accordingly, pursuant to the terms of the Indenture, the Company was permitted to make one or more restricted payments in the form of special dividends to holders of the Company’s common stock and/or repurchases of the Company’s common stock in the aggregate amount of up to $299,401,000 (the "RP Basket") without having to make another offer to repurchase Notes. The Company used a portion of the RP Basket to pay a special cash dividend totaling approximately $230.0 million, which was paid to stockholders on May 14, 2019 and intends to use the remainder of the RP Basket to make repurchases under the Stock Repurchase Program (as defined below).
Tender Offer
As of the Expiration Date, $415,099,000 aggregate principal amount of the Notes were validly tendered and not validly withdrawn pursuant to the Tender Offer. Pursuant to the terms of the Tender Offer:
(1) an automatic pro ration factor of 31.5789% was applied to the $415,099,000 aggregate principal amount of the Notes that were validly tendered and not validly withdrawn in the Tender Offer (rounded down to avoid the purchase of Notes in a principal amount other than in integrals of $1,000), which resulted in $130,966,000 aggregate principal amount of the Notes (the “TO Pro-Rated Tendered Notes”);
(2) the Company accepted all $130,966,000 aggregate principal amount of the TO Pro-Rated Tendered Notes for payment of the TO Repurchase Price in cash; and
(3) the remaining balance of $284,133,000 aggregate principal amount of the Notes tendered that were not TO Pro-Rated Tendered Notes were not accepted for payment and were returned to the tendering holder of the Notes.
The Company consummated the Tender Offer on March 26, 2019.
In connection with the payments for the RP Pro-Rated Tendered Notes and the TO Pro-Rated Tendered Notes, the Company recognized a loss on early extinguishment of debt of $9.8 million during the three months ended March 31, 2019.
ABL Facility
On March 24, 2020, the Company borrowed $70.0 million in a partial draw of the ABL Facility (the “ABL Draw”) as a precautionary measure in order to increase the Company’s cash position and preserve financial flexibility in light of the current uncertainty resulting from the COVID-19 outbreak. In accordance with the terms of the ABL Facility, the proceeds from the ABL Draw will be available to be used, if needed, for working capital and general corporate purposes. The Company believes that the $256.7 million of cash on hand as of March 31, 2020, provides it with adequate liquidity in the current environment. The Company intends to retain these funds in cash to preserve liquidity amid the growing uncertainty surrounding the COVID-19 outbreak.
Note 6—Other Long-Term Liabilities
Other long-term liabilities are summarized as follows (in thousands):
WARRIOR MET COAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)
THREE MONTHS ENDED MARCH 31, 2020 (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
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 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. The Company recognizes lease expense on these agreements on a straight-line basis over 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 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):
|
|
|
|
|
|
|
|
|
|
|
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 $4.8 million and are included in property, plant and equipment, net in the Condensed Balance Sheet as of March 31, 2020 and the Balance Sheet as of December 31, 2019, respectively.
(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.
The components of lease expense were as 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
|
|
(1) Includes leases that are for periods of 12 months or less.
WARRIOR MET COAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)
THREE MONTHS ENDED MARCH 31, 2020 (UNAUDITED)
Maturities of lease liabilities were as follows (in thousands):
|
|
|
|
|
|
|
|
Finance Leases(1)
|
2020
|
|
$
|
7,978
|
|
2021
|
|
13,089
|
|
2022
|
|
8,558
|
|
2023
|
|
8,558
|
|
2024
|
|
842
|
|
Thereafter
|
|
—
|
|
Total
|
|
39,025
|
|
Less: amount representing interest
|
|
(4,897
|
)
|
Present value of lease liabilities
|
|
$
|
34,128
|
|
(1) Finance lease payments include $4.5 million of future payments required under signed lease agreements that have not yet commenced.
Supplemental cash flow information related to leases was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended
March 31,
|
|
|
2020
|
|
2019
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
|
Operating cash flows from finance leases
|
|
$
|
546
|
|
|
$
|
13
|
|
Financing cash flows from finance leases
|
|
$
|
3,833
|
|
|
$
|
1,957
|
|
Non-cash right-of-use assets obtained in exchange for lease obligations:
|
|
|
|
|
Finance leases
|
|
$
|
2,286
|
|
|
$
|
2,086
|
|
As of March 31, 2020, the Company had additional commitments for finance leases, primarily for mining equipment, that have not yet commenced of $4.5 million. These finance leases will commence between fiscal year 2020 and 2021 with lease terms of one to two years.
Note 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
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)
2017 Equity Plan
On February 13, 2020, the Company awarded 420,303 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, 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 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 23,295 share impact on dilutive weighted average shares for 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 March 31, 2020, there were 43,580 shares of the 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 its common stock contingently issuable upon the settlement of a vested restricted stock unit award under the 2017 Equity Plan. The settlement date for these awards is the earlier of a change in control as described in the 2016 Equity Plan or 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 average shares used to compute basic and diluted net income per share.
2016 Equity Plan
As of March 31, 2020, there were 73,429 restricted stock unit awards granted under the Company's 2016 Equity Incentive Plan (the "2016 Equity Plan") to certain directors and 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 55,329 share impact on dilutive weighted average shares for the three months ended March 31, 2020.
Note 9—Related Party Transactions
The Company owns a 50% interest in Black Warrior Methane (“BWM”) and Black Warrior Transmission (“BWT”), which are accounted for under the proportionate consolidation method and equity method, respectively. The Company has granted the rights to produce and sell methane gas from its coal mines to BWM and BWT. The Company’s net investments in, advances to/from 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 totaled $0.5 million for the three months ended March 31, 2020 and $0.1 million, for the three months ended March 31, 2019.
Note 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 it is in 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 March 31, 2020 and December 31, 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 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 March 31, 2020 and December 31, 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 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 March 2020, the Company received approximately $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 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 March 31, 2020 and December 31, 2019, the Company had no liability recorded for minimum throughput requirements.
Royalty 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 $14.2 million for the three months ended March 31, 2020 and $26.7 million for the three months ended March 31, 2019.
Note 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.
Stock Repurchase Program
On March 26, 2019, the Company's board of directors (the "Board") approved the Company's second stock repurchase program (the “Stock Repurchase Program”) that authorizes repurchases of up to an aggregate of $70.0 million of the
WARRIOR MET COAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)
THREE MONTHS ENDED MARCH 31, 2020 (UNAUDITED)
Company's outstanding common stock. The Company fully 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 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, 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 Stock Repurchase Program from cash on hand and/or other sources of liquidity.
As of March 31, 2020, the Company has 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 novel coronavirus disease 2019 ("COVID-19") and as a precautionary measure to preserve liquidity, the Company is temporarily suspending its share repurchase program. The Company will continue to monitor its liquidity in light of the COVID-19 pandemic and will consider when to reinstate the program.
Regular Quarterly Dividend
On February 14, 2020, the Board declared a regular quarterly cash dividend of $0.05 per share, totaling $2.6 million, which was paid on March 2, 2020, to stockholders of record as of the close of business on February 25, 2020.
Note 12—Fair Value of Financial Instruments
The Company had no assets or any other liabilities measured at fair value on a recurring basis as of March 31, 2020 or December 31, 2019.
The following methods and assumptions were used to estimate the fair value for which the fair value option was not elected:
Cash and cash equivalents, short-term investments, receivables and trade accounts payable—The carrying amounts reported in the Condensed Balance Sheets 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 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 no 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.
Note 13—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.
WARRIOR MET COAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)
THREE MONTHS ENDED MARCH 31, 2020 (UNAUDITED)
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 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
March 31,
|
|
2020
|
|
2019
|
Revenues
|
|
|
|
Mining
|
$
|
221,338
|
|
|
$
|
369,681
|
|
All other
|
5,382
|
|
|
8,609
|
|
Total revenues
|
$
|
226,720
|
|
|
$
|
378,290
|
|
|
|
|
|
|
|
|
|
|
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
|
|
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):
WARRIOR MET COAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)
THREE MONTHS ENDED MARCH 31, 2020 (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
For the three months ended
March 31,
|
|
2020
|
|
2019
|
Segment Adjusted EBITDA
|
$
|
69,824
|
|
|
$
|
187,053
|
|
Other revenues
|
5,382
|
|
|
8,609
|
|
Cost of other revenues
|
(7,561
|
)
|
|
(7,745
|
)
|
Depreciation and depletion
|
(28,692
|
)
|
|
(22,233
|
)
|
Selling, general and administrative
|
(8,456
|
)
|
|
(8,905
|
)
|
Loss on early extinguishment of debt
|
—
|
|
|
(9,756
|
)
|
Other income
|
1,822
|
|
|
—
|
|
Interest expense, net
|
(7,533
|
)
|
|
(8,592
|
)
|
Income tax expense
|
(3,241
|
)
|
|
(27,984
|
)
|
Net income
|
$
|
21,545
|
|
|
$
|
110,447
|
|
Note 14—Subsequent Events
Regular Quarterly Dividend
On April 24, 2020, the Board declared a regular quarterly cash dividend of $0.05 per share, totaling approximately $2.6 million, which will be paid on May 11, 2020 to stockholders of record as of the close of business on May 5, 2020.