Arch Resources(ARCH) - 2019 Q2 - Quarterly Report

Part I FINANCIAL INFORMATION Financial Statements Arch Coal, Inc.'s unaudited condensed consolidated financial statements for the three and six months ended June 30, 2019 and 2018 are presented, including statements of operations, comprehensive income, balance sheets, cash flows, stockholders' equity, and accompanying notes detailing accounting policies and significant events, such as the proposed joint venture with Peabody Energy Condensed Consolidated Statements of Operations Revenues decreased in both the three and six-month periods ended June 30, 2019, compared to the same periods in 2018, but net income and earnings per share (EPS) showed significant improvement, driven by lower costs and a large positive change in the fair value of coal derivatives Consolidated Statements of Operations Highlights (in thousands, except per share data) | Metric | Three Months Ended June 30, 2019 | Three Months Ended June 30, 2018 | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | | :--- | :--- | :--- | :--- | :--- | | Revenues | $570,222 | $592,349 | $1,125,405 | $1,167,644 | | Income from operations | $66,570 | $44,595 | $143,349 | $109,762 | | Net income | $62,840 | $43,306 | $135,581 | $103,291 | | Diluted earnings per common share | $3.53 | $2.06 | $7.45 | $4.81 | | Dividends declared per common share | $0.45 | $0.40 | $0.90 | $0.80 | Condensed Consolidated Balance Sheets As of June 30, 2019, total assets remained stable compared to December 31, 2018, while total liabilities saw a slight increase and stockholders' equity decreased slightly, primarily due to treasury stock repurchases offsetting retained earnings growth Balance Sheet Highlights (in thousands) | Metric | June 30, 2019 (Unaudited) | December 31, 2018 | | :--- | :--- | :--- | | Total current assets | $840,693 | $878,783 | | Total assets | $1,889,530 | $1,887,060 | | Total current liabilities | $314,544 | $329,335 | | Long-term debt | $295,263 | $300,186 | | Total liabilities | $1,191,580 | $1,182,239 | | Total stockholders' equity | $697,950 | $704,821 | Condensed Consolidated Statements of Cash Flows For the six months ended June 30, 2019, cash provided by operating activities increased significantly, while cash used in investing activities increased due to higher capital expenditures, and cash used in financing activities rose from increased treasury stock purchases Cash Flow Summary for Six Months Ended June 30 (in thousands) | Activity | 2019 | 2018 | | :--- | :--- | :--- | | Cash provided by operating activities | $225,906 | $144,996 | | Cash used in investing activities | ($89,693) | ($35,326) | | Cash used in financing activities | ($168,721) | ($141,682) | | Decrease in cash and cash equivalents | ($32,508) | ($32,012) | | Cash and cash equivalents, end of period | $232,429 | $241,590 | Notes to Condensed Consolidated Financial Statements The notes provide detailed explanations of accounting policies and financial statement line items, including the definitive agreement for a joint venture with Peabody Energy, debt and financing arrangements, segment performance data, revenue disaggregation, and derivative instruments - On June 18, 2019, Arch entered into a definitive agreement with Peabody Energy Corporation to form a joint venture combining their Powder River Basin and Colorado mining operations. Arch will hold a 33.5% economic interest, and Peabody will hold 66.5%[25] - The formation of the joint venture is subject to regulatory approvals, including under the Hart-Scott-Rodino Act, and does not require stockholder approval from either company[26] - The company's total debt as of June 30, 2019, was approximately $308.3 million, primarily consisting of a term loan due in 2024[56] - The Metallurgical (MET) segment was the largest contributor to Adjusted EBITDA for the six months ended June 30, 2019, with $193.5 million, followed by the Powder River Basin (PRB) segment with $35.3 million[102] Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) The company's performance is discussed, highlighting that strong metallurgical coal markets in Q2 2019 were offset by adversity in thermal coal markets due to rail disruptions and low natural gas prices, alongside the agreement with Peabody to form a joint venture and continued capital return programs Results of Operations For Q2 2019, revenues decreased by 3.7% YoY to $570.2 million, while tons sold fell 8.6%, driven by lower volumes in the Powder River Basin and Other Thermal segments, though operating income improved due to lower cost of sales and a significant gain on coal derivatives Coal Sales Comparison | Period | 2019 Coal Sales | 2018 Coal Sales | Change | 2019 Tons Sold | 2018 Tons Sold | Change | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Q2 | $570.2M | $592.3M | ($22.1M) | 21.0M | 23.0M | (2.0M) | | H1 | $1,125.4M | $1,167.6M | ($42.2M) | 41.7M | 46.6M | (4.9M) | - Cost of sales for Q2 2019 decreased by $23.3 million (4.9%) YoY, mainly due to lower purchased coal costs, transportation costs, and a larger build in coal inventories[119] - A significant positive impact on operating income came from the change in fair value of coal derivatives, which contributed an $8.4 million gain in Q2 2019 versus a $15.1 million loss in Q2 2018, a favorable swing of $23.5 million[119][123] - The company recorded a $4.3 million loss related to contingent workers' compensation liabilities from the bankruptcy of Revelation Energy LLC, to whom it had previously sold Lone Mountain Processing, LLC[125][136] Operational Performance In Q2 2019, the Metallurgical segment's Adjusted EBITDA grew to $101.9 million due to a 10.7% increase in cash margin per ton, while the Powder River Basin and Other Thermal segments saw declines in Adjusted EBITDA from lower volumes and higher costs, exacerbated by rail disruptions Segment Performance per Ton Sold (Three Months Ended June 30) | Segment | Metric | 2019 | 2018 | Variance | | :--- | :--- | :--- | :--- | :--- | | Powder River Basin | Cash margin per ton | $0.79 | $1.40 | ($0.61) | | | Adjusted EBITDA (in thousands) | $14,696 | $26,491 | ($11,795) | | Metallurgical | Cash margin per ton | $53.80 | $43.05 | $10.75 | | | Adjusted EBITDA (in thousands) | $101,936 | $86,657 | $15,279 | | Other Thermal | Cash margin per ton | $5.47 | $5.58 | ($0.11) | | | Adjusted EBITDA (in thousands) | $10,922 | $11,842 | ($920) | - Powder River Basin volume decline was exacerbated by flooding impacting rail performance, leading the company to reduce operations at its lower-quality Coal Creek mine due to market weakness[142] - The Metallurgical segment's performance was supported by strength in international metallurgical coal markets, leading to higher pricing[145] Liquidity and Capital Resources As of June 30, 2019, the company had total liquidity of approximately $508 million, repurchased $63.4 million of stock, paid $7.4 million in dividends, and plans to maintain liquidity between $400 million and $500 million while continuing capital allocation initiatives - Total liquidity was approximately $508 million at June 30, 2019, including $395 million in cash, equivalents, and short-term investments[171] - The company repurchased 697,255 shares for $63.4 million in Q2 2019 under its share repurchase program. Since inception, it has repurchased 8.8 million shares for $725.5 million[163][164] - A quarterly dividend of $0.45 per share was paid in June 2019, totaling approximately $7.4 million[165] - Cash from operations for the first six months of 2019 was $225.9 million, a significant increase from $145.0 million in the prior year period[173][174] Quantitative and Qualitative Disclosures About Market Risk The company is exposed to market risk from fluctuations in commodity prices, particularly for coal and diesel fuel, managing thermal coal price risk through long-term contracts and derivatives, while using Value at Risk (VaR) to monitor its trading portfolio and employing hedging strategies for anticipated diesel fuel consumption 2019 Sales Commitments (as of July 24, 2019) | Segment | Status | Tons (millions) | Price per ton | | :--- | :--- | :--- | :--- | | Metallurgical | Committed, Priced Coking | 3.7 | $129.32 (Blended) | | | Committed, Priced Thermal | 1.0 | $32.50 | | Powder River Basin | Committed, Priced | 69.1 | $12.10 | | Other Thermal | Committed, Priced | 7.1 | $39.53 | - For the six months ended June 30, 2019, the Value at Risk (VaR) for coal trading positions ranged from under $0.1 million to $0.2 million[183] - The company has hedged the majority of its expected diesel fuel purchases for the remainder of 2019 and approximately 22% of its expected 2020 purchases using swaps and options[185] Controls and Procedures Management, including the CEO and CFO, evaluated the company's disclosure controls and procedures and concluded they were effective as of June 30, 2019, with no material changes made to internal controls over financial reporting during the quarter - Management concluded that the company's disclosure controls and procedures were effective as of June 30, 2019[186] - There were no changes in internal control over financial reporting during the quarter that have materially affected, or are reasonably likely to materially affect, these controls[186] Part II OTHER INFORMATION Legal Proceedings The company is involved in various legal claims and lawsuits arising in the ordinary course of business, which management believes will not have a material adverse effect on the company's financial condition, results of operations, or liquidity - The company is party to various claims and legal actions from the ordinary course of business[187] - Management does not expect these proceedings to have a material adverse effect on the company's financials[187] Risk Factors This section highlights risks associated with the pending joint venture with Peabody, including the possibility of non-completion, failure to realize expected synergies, significant transaction costs, diversion of management's attention, and general risks of joint operations - There is no assurance that the joint venture with Peabody will be completed, as it is subject to regulatory approvals and other closing conditions[188] - Risks of the pending transaction include failure to realize expected synergies, incurring significant transaction costs, and potential adverse impacts on relationships with employees, customers, and suppliers[189] - If the Implementation Agreement is terminated by Arch under certain circumstances, the company may be required to pay Peabody a termination fee of up to $40.0 million[189] - General risks of joint ventures include inconsistent goals between partners, inability to control strategic decisions, and potential for litigation between partners[191] Unregistered Sales of Equity Securities and Use of Proceeds The company continued its share repurchase program, with a total authorization of $1.05 billion, repurchasing 697,255 shares for approximately $63.4 million in Q2 2019, leaving approximately $324 million authorized for future repurchases as of June 30, 2019 Share Repurchases for Three Months Ended June 30, 2019 | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | April 2019 | 311,019 | $91.63 | | May 2019 | 217,246 | $91.58 | | June 2019 | 168,990 | $88.76 | | Total | 697,255 | $90.92 | - On April 17, 2019, the board authorized an additional $300 million for the share repurchase program, bringing the total authorization to $1.05 billion[193] - As of June 30, 2019, the remaining authorized amount for stock repurchases under the program is approximately $324 million[194] Mine Safety Disclosures Information regarding mine safety violations and other regulatory matters as required by the Dodd-Frank Wall Street Reform and Consumer Protection Act is provided in Exhibit 95 of this quarterly report - The statement concerning mine safety violations is included in Exhibit 95 to this Quarterly Report on Form 10-Q[195] Exhibits This section lists all exhibits filed with the Form 10-Q, including the Implementation Agreement with Peabody Energy, various credit and loan agreements, CEO and CFO certifications, and the Mine Safety Disclosure exhibit - Exhibit 2.3 is the Implementation Agreement with Peabody Energy Corporation dated June 18, 2019[198] - Exhibits 31.1 and 31.2 are the CEO and CFO certifications pursuant to Rule 13a-14(a)/15d-14(a)[200] - Exhibit 95 contains the Mine Safety Disclosure[200] Signatures The report was signed by John T. Drexler, Senior Vice President and Chief Financial Officer, on behalf of the registrant on July 24, 2019 - The report was signed by John T. Drexler, Senior Vice President and Chief Financial Officer[202]