Arch Resources(US:ARCH)2020-10-23 20:45Part I Financial Information Financial Statements The company reported a significant net loss in Q3 2020, driven by declining revenues and a substantial asset impairment charge Condensed Consolidated Statements of Operations Highlights (in thousands) | Metric | Three Months Ended Sep 30, 2020 | Three Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | Revenues | $382,261 | $619,467 | $1,107,014 | $1,744,872 | | Income (loss) from operations | $(187,680) | $106,481 | $(256,857) | $249,830 | | Net income (loss) | $(191,467) | $106,769 | $(266,090) | $242,350 | | Diluted earnings (loss) per share | $(12.64) | $6.34 | $(17.57) | $13.66 | Condensed Consolidated Balance Sheet Highlights (in thousands) | Metric | September 30, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Total current assets | $562,982 | $706,747 | | Total assets | $1,653,337 | $1,867,756 | | Total liabilities | $1,287,691 | $1,227,220 | | Total stockholders' equity | $365,646 | $640,536 | Condensed Consolidated Statements of Cash Flows Highlights (in thousands) | Activity | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | | :--- | :--- | :--- | | Cash provided by operating activities | $55,914 | $334,053 | | Cash used in investing activities | $(111,945) | $(154,002) | | Cash provided by (used in) financing activities | $73,585 | $(269,560) | - During Q3 2020, the company recorded a significant asset impairment charge of $163.1 million related to its thermal coal segments and an equity investment, driven by reduced demand, low prices, and the termination of the proposed joint venture with Peabody333435 Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Management attributes poor Q3 2020 results to weak coal markets and COVID-19, leading to strategic shifts including thermal asset divestiture and dividend suspension - The proposed joint venture with Peabody Energy was blocked by the U.S. District Court on September 29, 2020, leading Arch to terminate the joint venture and pursue strategic alternatives for its thermal assets, including potential divestiture, to focus on metallurgical products136 - The COVID-19 pandemic significantly impacted domestic and global economies, leading to demand destruction for coal, with the company receiving force majeure notices and deferring over three million tons of Powder River Basin contractual obligations131133 - As of September 30, 2020, total liquidity was approximately $265 million, and the company suspended its quarterly dividend and share repurchase program in April 2020 to preserve capital and fund the Leer South development197196 Results of Operations Q3 2020 revenues declined 38.3% to $382.3 million due to lower sales volumes and pricing, resulting in a significant operating loss and a nine-month net loss Coal Sales Performance (Q3 2020 vs Q3 2019) | Metric | Q3 2020 | Q3 2019 | Change | | :--- | :--- | :--- | :--- | | Coal sales (in thousands) | $382,261 | $619,467 | $(237,206) | | Tons sold (in thousands) | 17,128 | 26,257 | (9,129) | - The decrease in Q3 2020 coal sales was driven by an $86.4 million decline from Metallurgical operations, an $89.1 million decline from the Powder River Basin, and a $61.6 million decline from Other Thermal operations138 - A major contributor to the operating loss in Q3 2020 was a $163.1 million asset impairment charge related to the Coal Creek, West Elk, and Viper thermal mines, and the Knight Hawk equity investment139145 Coal Sales Performance (Nine Months 2020 vs 2019) | Metric | Nine Months 2020 | Nine Months 2019 | Change | | :--- | :--- | :--- | :--- | | Coal sales (in thousands) | $1,107,014 | $1,744,872 | $(637,858) | | Tons sold (in thousands) | 47,367 | 67,958 | (20,591) | Operational Performance All operating segments experienced significant Adjusted EBITDA declines, with Metallurgical cash margin per ton collapsing due to lower pricing and Powder River Basin volumes decreasing Segment Performance (Three Months Ended September 30) | Segment | Metric | 2020 | 2019 | | :--- | :--- | :--- | :--- | | Powder River Basin | Adjusted EBITDA (in thousands) | $34,486 | $50,153 | | | Cash margin per ton sold | $2.38 | $2.25 | | Metallurgical | Adjusted EBITDA (in thousands) | $12,407 | $70,814 | | | Cash margin per ton sold | $6.26 | $34.00 | | Other Thermal | Adjusted EBITDA (in thousands) | $(2,870) | $16,659 | | | Cash margin per ton sold | $(2.96) | $8.36 | - The Metallurgical segment's performance was severely impacted by declining coking coal prices and lower shipment volumes due to COVID-19's effect on the steelmaking supply chain173 - The Powder River Basin segment's volume decline was driven by competitive natural gas pricing, growth in renewable energy, and reduced electricity demand from COVID-19 responses171 Liquidity and Capital Resources Liquidity decreased to $265 million by Q3 2020, leading to dividend suspension and new financing, while cash from operations plummeted due to poor results - Total liquidity as of September 30, 2020 was approximately $265 million, comprising $220 million in cash and investments and $44.6 million in availability under credit facilities197198 - In 2020, the company entered into a $53.6 million equipment financing arrangement and arranged for $53.1 million in tax-exempt bonds to finance the Leer South development project194195 - Cash from operations for the nine months ended Sep 30, 2020, was $55.9 million, a significant decrease from $334.1 million in the same period of 2019, due to deteriorating operational results199200 Quantitative and Qualitative Disclosures About Market Risk The company faces commodity price risk, particularly in coal markets, and uses derivatives to manage diesel fuel price exposure, with specific sales commitments detailed Sales Commitments as of October 22, 2020 (Priced Tons) | Segment | 2020 Tons (millions) | 2020 Price/ton | 2021 Tons (millions) | 2021 Price/ton | | :--- | :--- | :--- | :--- | :--- | | Metallurgical (Coking & Thermal) | 6.1 | - | 2.0 | - | | Powder River Basin | 53.6 | $12.35 | 42.8 | $12.56 | | Other Thermal | 3.2 | $30.12 | 1.7 | $34.28 | - The company is exposed to price risk for diesel fuel and uses derivatives to manage it, having protected prices on approximately 4 million gallons through swaps and options for the remainder of 2020208 Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of September 30, 2020, with no material changes to internal controls - Based on an evaluation as of September 30, 2020, the CEO and CFO concluded that the company's disclosure controls and procedures were effective210 Part II Other Information Legal Proceedings The U.S. District Court ruled in favor of the FTC on September 29, 2020, blocking the proposed joint venture with Peabody Energy, leading to its termination - On February 26, 2020, the FTC filed a complaint to block the proposed joint venture with Peabody Energy, alleging it would eliminate competition in the Southern Powder River Basin thermal coal market215 - The U.S. District Court upheld the FTC's decision on September 29, 2020, after which the company and Peabody jointly terminated the joint venture216 Risk Factors The ongoing COVID-19 pandemic significantly impacts global economies, financial markets, and coal demand and prices, potentially exacerbating existing business risks - The COVID-19 pandemic has caused a widespread health crisis and economic downturn, which has negatively impacted and will continue to adversely affect the company's business, financial condition, and results of operations218219 - The pandemic may heighten other risks, including those related to coal prices, market conditions, capital access, supply chain disruptions, and customer purchasing patterns221 Unregistered Sales of Equity Securities and Use of Proceeds The company did not repurchase common stock in Q3 2020, with $223 million remaining under its $1.05 billion share repurchase authorization - No shares of common stock were repurchased during the quarter ended September 30, 2020223 - As of September 30, 2020, approximately $223 million was remaining under the company's total $1.05 billion share repurchase authorization224223 Mine Safety Disclosures Mine safety violation information, as required by the Dodd-Frank Act, is provided in Exhibit 95 to this Quarterly Report on Form 10-Q - The statement concerning mine safety violations required by Section 1503(a) of the Dodd-Frank Act is included as Exhibit 95 to the Form 10-Q225 Exhibits This section lists all exhibits filed with the Form 10-Q, including credit agreements, financing amendments, and CEO/CFO certifications - Lists various legal and financial documents filed as exhibits, including amendments to credit and receivables purchase agreements227228 - Includes CEO and CFO certifications under Sarbanes-Oxley Sections 302 (Rule 13a-14(a)) and 906 (Section 1350)233