Attached files
file | filename |
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EX-95.1 - EX-95.1 - Armstrong Energy, Inc. | d913308dex951.htm |
EX-31.2 - EX-31.2 - Armstrong Energy, Inc. | d913308dex312.htm |
EX-32.2 - EX-32.2 - Armstrong Energy, Inc. | d913308dex322.htm |
EX-32.1 - EX-32.1 - Armstrong Energy, Inc. | d913308dex321.htm |
EXCEL - IDEA: XBRL DOCUMENT - Armstrong Energy, Inc. | Financial_Report.xls |
EX-31.1 - EX-31.1 - Armstrong Energy, Inc. | d913308dex311.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2015
or
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number: 333-191182
(Exact name of registrant as specified in its charter)
Delaware | 20-8015664 | |
(State or other jurisdiction of incorporation or organization) |
(IRS Employer Identification No.) | |
7733 Forsyth Boulevard, Suite 1625 St. Louis, Missouri |
63105 | |
(Address of principal executive offices) | (Zip code) |
(314) 721 8202
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes ¨ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x Yes ¨ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ¨ | Accelerated filer | ¨ | |||
Non-accelerated filer | x (Do not check if a smaller reporting company) | Smaller reporting company | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes x No
As of May 1, 2015, there were 21,853,224 shares of Armstrong Energy, Inc.s Common Stock outstanding.
Table of Contents
Page | ||||||
PART I FINANCIAL INFORMATION | ||||||
Item 1. | 1 | |||||
Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
18 | ||||
Item 3. | 25 | |||||
Item 4. | 25 | |||||
PART II OTHER INFORMATION | ||||||
Item 1. | 26 | |||||
Item 1A. | 26 | |||||
Item 4. | 26 | |||||
Item 5. | 26 | |||||
Item 6. | 27 | |||||
29 |
Table of Contents
PART I FINANCIAL INFORMATION
Armstrong Energy, Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
March 31, 2015 |
December 31, 2014 |
|||||||
(Unaudited) | ||||||||
ASSETS | ||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 61,812 | $ | 59,518 | ||||
Accounts receivable |
23,730 | 21,799 | ||||||
Inventories |
12,403 | 10,552 | ||||||
Prepaid and other assets |
1,843 | 2,962 | ||||||
Deferred income taxes |
951 | 735 | ||||||
|
|
|
|
|||||
Total current assets |
100,739 | 95,566 | ||||||
Property, plant, equipment, and mine development, net |
399,671 | 408,740 | ||||||
Investments |
3,408 | 3,372 | ||||||
Other non-current assets |
24,984 | 24,769 | ||||||
|
|
|
|
|||||
Total assets |
$ | 528,802 | $ | 532,447 | ||||
|
|
|
|
|||||
LIABILITIES AND STOCKHOLDERS EQUITY | ||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 28,453 | $ | 27,593 | ||||
Accrued and other liabilities |
25,226 | 17,117 | ||||||
Current portion of capital lease obligations |
2,254 | 2,426 | ||||||
Current maturities of long-term debt |
4,580 | 4,929 | ||||||
|
|
|
|
|||||
Total current liabilities |
60,513 | 52,065 | ||||||
Long-term debt, less current maturities |
198,437 | 198,960 | ||||||
Long-term obligation to related party |
110,941 | 110,713 | ||||||
Related party payables, net |
22,062 | 18,172 | ||||||
Asset retirement obligations |
16,684 | 17,379 | ||||||
Long-term portion of capital lease obligations |
854 | 1,358 | ||||||
Deferred income taxes |
951 | 735 | ||||||
Other non-current liabilities |
8,594 | 8,208 | ||||||
|
|
|
|
|||||
Total liabilities |
419,036 | 407,590 | ||||||
Stockholders equity: |
||||||||
Common stock, $0.01 par value, 70,000,000 shares authorized, 21,853,224 and 21,936,844 shares issued and outstanding as of March 31, 2015 and December 31, 2014, respectively |
218 | 219 | ||||||
Preferred stock, $0.01 par value, 1,000,000 shares authorized, zero shares issued and outstanding as of March 31, 2015 and December 31, 2014, respectively |
| | ||||||
Additional paid-in-capital |
238,608 | 238,549 | ||||||
Accumulated deficit |
(125,447 | ) | (110,193 | ) | ||||
Accumulated other comprehensive loss |
(3,636 | ) | (3,741 | ) | ||||
|
|
|
|
|||||
Armstrong Energy, Inc.s equity |
109,743 | 124,834 | ||||||
Non-controlling interest |
23 | 23 | ||||||
|
|
|
|
|||||
Total stockholders equity |
109,766 | 124,857 | ||||||
|
|
|
|
|||||
Total liabilities and stockholders equity |
$ | 528,802 | $ | 532,447 | ||||
|
|
|
|
See accompanying notes to unaudited condensed consolidated financial statements.
1
Table of Contents
Armstrong Energy, Inc. and Subsidiaries
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands)
Three Months Ended March 31, |
||||||||
2015 | 2014 | |||||||
Revenue |
$ | 96,335 | $ | 110,866 | ||||
Costs and expenses: |
||||||||
Cost of coal sales, exclusive of items shown separately below |
78,830 | 90,119 | ||||||
Production royalty to related party |
2,001 | 2,024 | ||||||
Depreciation, depletion, and amortization |
16,904 | 10,207 | ||||||
Asset retirement obligation expense |
867 | 508 | ||||||
General and administrative expenses |
4,639 | 5,246 | ||||||
|
|
|
|
|||||
Operating (loss) income |
(6,906 | ) | 2,762 | |||||
Other income (expense): |
||||||||
Interest expense, net |
(8,377 | ) | (8,244 | ) | ||||
Other, net |
29 | 182 | ||||||
|
|
|
|
|||||
Loss before income taxes |
(15,254 | ) | (5,300 | ) | ||||
Income taxes |
| | ||||||
|
|
|
|
|||||
Net loss |
(15,254 | ) | (5,300 | ) | ||||
Less: income attributable to non-controlling interest |
| | ||||||
|
|
|
|
|||||
Net loss attributable to common stockholders |
$ | (15,254 | ) | $ | (5,300 | ) | ||
|
|
|
|
See accompanying notes to unaudited condensed consolidated financial statements.
2
Table of Contents
Armstrong Energy, Inc. and Subsidiaries
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Dollars in thousands)
Three Months Ended March 31, |
||||||||
2015 | 2014 | |||||||
Net loss |
$ | (15,254 | ) | $ | (5,300 | ) | ||
Other comprehensive income (loss): |
||||||||
Postretirement benefit plan and other employee benefit obligations, net of tax of zero |
105 | 26 | ||||||
|
|
|
|
|||||
Other comprehensive income (loss) |
105 | 26 | ||||||
|
|
|
|
|||||
Comprehensive loss |
(15,149 | ) | (5,274 | ) | ||||
Less: comprehensive income (loss) attributable to non-controlling interests |
| | ||||||
|
|
|
|
|||||
Comprehensive loss attributable to common stockholders |
$ | (15,149 | ) | $ | (5,274 | ) | ||
|
|
|
|
See accompanying notes to unaudited condensed consolidated financial statements.
3
Table of Contents
Armstrong Energy, Inc. and Subsidiaries
UNAUDITED CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
Three Months Ended March 31, 2015
(Amounts in thousands)
Common Stock | Preferred Stock | Additional | Accumulated Other |
Total | ||||||||||||||||||||||||||||||||
Number of Shares |
Amount | Number of Shares |
Amount | Paid-in- Capital |
Accumulated Deficit |
Comprehensive Loss |
Non-Controlling Interest |
Stockholders Equity |
||||||||||||||||||||||||||||
Balance at December 31, 2014 |
21,937 | $ | 219 | | $ | | $ | 238,549 | $ | (110,193 | ) | $ | (3,741 | ) | $ | 23 | $ | 124,857 | ||||||||||||||||||
Net loss |
| | | | | (15,254 | ) | | | (15,254 | ) | |||||||||||||||||||||||||
Stock based compensation |
| | | | 58 | | | | 58 | |||||||||||||||||||||||||||
Postretirement benefit plan and other employee benefit obligations, net of tax of zero |
| | | | | | 105 | | 105 | |||||||||||||||||||||||||||
Repurchase of common stock |
(84 | ) | (1 | ) | | | 1 | | | | | |||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Balance at March 31, 2015 |
21,853 | $ | 218 | | $ | | $ | 238,608 | $ | (125,447 | ) | $ | (3,636 | ) | $ | 23 | $ | 109,766 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to unaudited condensed consolidated financial statements.
4
Table of Contents
Armstrong Energy, Inc. and Subsidiaries
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Three Months Ended March 31, |
||||||||
2015 | 2014 | |||||||
Cash Flows from Operating Activities: |
||||||||
Net loss |
$ | (15,254 | ) | $ | (5,300 | ) | ||
Adjustments to reconcile net loss to net cash provided by operating activities: |
||||||||
Non-cash stock compensation expense |
58 | 63 | ||||||
Income from equity affiliate |
(35 | ) | (6 | ) | ||||
Loss on disposal of property, plant and equipment |
72 | | ||||||
Amortization of original issue discount |
204 | 181 | ||||||
Amortization of debt issuance costs |
374 | 309 | ||||||
Depreciation, depletion and amortization |
16,904 | 10,207 | ||||||
Asset retirement obligation expenses |
867 | 508 | ||||||
Non-cash activity with related party, net |
4,118 | 3,456 | ||||||
Non-cash interest on long-term obligations |
5,881 | 5,882 | ||||||
Change in operating assets and liabilities: |
||||||||
Increase in accounts receivable |
(1,931 | ) | (6,094 | ) | ||||
Increase in inventories |
(1,851 | ) | (1,610 | ) | ||||
Decrease (increase) in prepaid and other assets |
1,119 | (107 | ) | |||||
Increase in other non-current assets |
(597 | ) | (2,506 | ) | ||||
Increase in accounts payable and accrued and other liabilities |
2,072 | 3,205 | ||||||
Increase in other non-current liabilities |
385 | 292 | ||||||
|
|
|
|
|||||
Net cash provided by operating activities: |
12,386 | 8,480 | ||||||
Cash Flows from Investing Activities: |
||||||||
Investment in property, plant, equipment, and mine development |
(8,611 | ) | (3,148 | ) | ||||
Proceeds from disposal of fixed assets |
475 | | ||||||
|
|
|
|
|||||
Net cash used in investing activities |
(8,136 | ) | (3,148 | ) | ||||
Cash Flows from Financing Activities: |
||||||||
Payment on capital lease obligations |
(677 | ) | (893 | ) | ||||
Payments of long-term debt |
(1,279 | ) | (2,876 | ) | ||||
Repurchase of employee stock relinquished for tax withholdings |
| (87 | ) | |||||
|
|
|
|
|||||
Net cash used in financing activities |
(1,956 | ) | (3,856 | ) | ||||
|
|
|
|
|||||
Net change in cash and cash equivalents |
2,294 | 1,476 | ||||||
Cash and cash equivalents, at the beginning of the period |
59,518 | 51,632 | ||||||
|
|
|
|
|||||
Cash and cash equivalents, at the end of the period |
$ | 61,812 | $ | 53,108 | ||||
|
|
|
|
|||||
Three Months Ended March 31, |
||||||||
2015 | 2014 | |||||||
Supplemental cash flow information: |
||||||||
Non-Cash Transactions: |
||||||||
Assets acquired with long-term debt |
$ | 202 | $ | 971 |
See accompanying notes to unaudited condensed consolidated financial statements.
5
Table of Contents
Armstrong Energy, Inc. and Subsidiaries
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
1. DESCRIPTION OF BUSINESS AND ENTITY STRUCTURE
Business
The accompanying unaudited condensed consolidated financial statements include the accounts of Armstrong Energy, Inc. and its subsidiaries and controlled entities (collectively, the Company or AE). The Companys primary business is the production of thermal coal from surface and underground mines located in western Kentucky, for sale to utility and industrial markets. Intercompany transactions and accounts have been eliminated in consolidation.
The Companys wholly-owned subsidiary, Elk Creek GP, LLC (ECGP), is the sole general partner of and has an approximate 0.2% ownership in Thoroughbred Resources, L.P. (Thoroughbred) (formerly Armstrong Resource Partners, L.P.). The various limited partners of Thoroughbred are related parties, as the entity is majority owned by investment funds managed by Yorktown Partners LLC (Yorktown), which has a majority ownership in the Company. The Company does not consolidate the financial results of Thoroughbred and accounts for its ownership in Thoroughbred under the equity method.
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP) for interim financial reporting and U.S. Securities and Exchange Commission (SEC) regulations. In the opinion of management, all adjustments consisting of normal, recurring accruals considered necessary for a fair presentation have been included. Balance sheet information presented herein as of December 31, 2014 has been derived from the Companys audited consolidated balance sheet at that date. Results of operations for the three months ended March 31, 2015 are not necessarily indicative of results to be expected for the year ending December 31, 2015. Certain prior year amounts have been reclassified to conform with the 2015 presentation. These financial statements should be read in conjunction with the audited financial statements and related notes as of and for the year ended December 31, 2014 included in the Companys Annual Report on Form 10-K filed with the SEC.
Recent Accounting Pronouncements
In April 2015, the Financial Accounting Standards Board (FASB) issued guidance requiring an entity to present debt issuance costs on the balance sheet as a direct deduction from the related debt liability as opposed to an asset. Amortization of the costs will continue to be reported as interest expense. The update is effective for annual reporting periods (including interim reporting periods within those periods) beginning after December 15, 2015. Early adoption is permitted for financial statements that have not been previously issued, and the new guidance would be applied retrospectively to all prior periods presented. The adoption of this standard update is not expected to have a material impact on the Companys consolidated financial statements.
In August 2014, the FASB issued guidance on managements responsibility in evaluating, at each annual and interim reporting period, whether there is substantial doubt about an entitys ability to continue as a going concern and to provide related footnote disclosures. The new guidance is effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter with early adoption permitted.
In May 2014, the FASB issued a comprehensive revenue recognition standard that will supersede nearly all existing revenue recognition guidance under U.S. GAAP. The standard requires revenue to be recognized when promised goods or services are transferred to a customer in an amount that reflects the consideration expected in exchange for those goods or services. The standard permits the use of either the full retrospective or modified retrospective transition method. This guidance is currently effective for annual and interim reporting periods beginning after December 15, 2016, with early adoption not permitted. In April 2015, the FASB voted for a proposed one-year deferral of the effective date of the new revenue recognition standard. If approved, the new standard will become effective for annual and interim periods beginning after December 15, 2017 with early adoption as of the original effective date permitted. The Company is currently evaluating the impact of this new pronouncement on its financial statements.
2. INVENTORIES
Inventories consist of the following amounts:
March 31, 2015 |
December 31, 2014 |
|||||||
Materials and supplies |
$ | 10,470 | $ | 10,378 | ||||
Coalraw and saleable |
1,933 | 174 | ||||||
|
|
|
|
|||||
Total |
$ | 12,403 | $ | 10,552 | ||||
|
|
|
|
6
Table of Contents
Armstrong Energy, Inc. and Subsidiaries
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. ACCRUED AND OTHER LIABILITIES
Accrued and other liabilities consist of the following amounts:
March 31, 2015 |
December 31, 2014 |
|||||||
Payroll and related benefits |
$ | 7,947 | $ | 7,661 | ||||
Taxes other than income taxes |
5,145 | 4,588 | ||||||
Interest |
6,854 | 991 | ||||||
Asset retirement obligations |
860 | 342 | ||||||
Royalties |
1,019 | 691 | ||||||
Other |
3,401 | 2,844 | ||||||
|
|
|
|
|||||
Total |
$ | 25,226 | $ | 17,117 | ||||
|
|
|
|
4. OTHER NON-CURRENT ASSETS
Other non-current assets consist of the following amounts:
March 31, 2015 |
December 31, 2014 |
|||||||
Escrows and deposits |
$ | 4,665 | $ | 4,649 | ||||
Restricted surety and cash bonds |
6,653 | 6,379 | ||||||
Advanced royalties |
5,148 | 4,842 | ||||||
Deferred financing costs, net |
8,391 | 8,765 | ||||||
Intangible assets, net |
127 | 134 | ||||||
|
|
|
|
|||||
Total |
$ | 24,984 | $ | 24,769 | ||||
|
|
|
|
5. RELATED PARTY TRANSACTIONS
Merger of Related Parties
On February 1, 2014, Armstrong Resource Partners, L.P. merged with and into Thoroughbred Resources, LLC, with Armstrong Resource Partners, L.P. as the surviving entity (the Merger). Effective with the Merger, Armstrong Resource Partners, L.P. changed its name to Thoroughbred. The Companys wholly-owned subsidiary, ECGP, remained the general partner of the surviving entity, under the terms of the amended and restated limited partnership agreement, which is substantially the same as the limited partnership agreement in effect immediately prior to the Merger. As a result of the Merger, ECGPs equity interest in the combined company was reduced to approximately 0.2%.
In January 2014, the Companys investment in Ram Terminals, LLC (RAM), an entity majority owned by Yorktown, was converted into an equal ownership percentage of Terminal Holdings, LLC, a holding company which is the sole member of both RAM and MG Midstreaming, LLC. Subsequent to the Merger, but also on February 1, 2014, Terminal Holdings, LLC merged with and into a merger subsidiary of Thoroughbred created for the purpose of the transaction, with Terminal Holdings, LLC as the surviving entity. Terminal Holdings, LLC was owned by the Company and Yorktown in the same percentage as their prior interests in RAM, and by virtue of the merger, the Companys equity interest in Terminal Holdings, LLC was converted into an equal number of common units representing limited partnership interests in Thoroughbred. Because of the Companys ownership interest in Thoroughbred through ECGP, the newly converted interest, which equals an additional 0.9%, is accounted for under the equity method.
As of March 31, 2015, the Companys total ownership in Thoroughbred equaled 1.1%. Income from the equity interest in Thoroughbred for the three months ended March 31, 2015 and 2014 totaled $35, and $6, respectively.
Sale of Coal Reserves
The Company has executed the sale of an undivided interest in certain land and mineral reserves to Thoroughbred, through a series of transactions beginning in February 2011. Subsequently, the Company entered into lease agreements with Thoroughbred pursuant to which Thoroughbred granted the Company leases to its undivided interests in the mining properties acquired and licenses to mine and sell coal from those properties in exchange for a production royalty. Due to the Companys continuing involvement in the land and mineral reserves transferred, these transactions have been accounted for as financing arrangements. A long-term obligation
7
Table of Contents
Armstrong Energy, Inc. and Subsidiaries
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
has been established that is being amortized over the anticipated life of the mineral reserves, at an annual rate of 7% of the estimated gross revenue generated from the sale of the coal originating from the leased mineral reserves. In addition, effective February 2011, the Company and Thoroughbred entered into a Royalty Deferment and Option Agreement, whereby the Company has been granted an option to defer payment of any royalties earned by Thoroughbred on coal mined from these properties. Compensation for the aforementioned transactions has consisted of a combination of cash payments and the forgiveness of amounts owed by the Company, which primarily consisted of deferred royalties.
On October 1, 2014, the Company transferred to Thoroughbred a portion of its interest in certain land and mineral reserves the Company controls in Muhlenberg county in exchange for Thoroughbred conveying to the Company a 7.97% undivided interest in the land and mineral reserves previously transferred by the Company to Thoroughbred. This transaction was determined to be a fair and reasonable arms-length transaction by the conflicts committee of the board of directors of the Company, a committee comprised of only independent directors.
On that same date, the Company sold an additional 3.85% undivided interest in certain leased and owned land and mineral reserves to Thoroughbred in exchange for Thoroughbred forgiving amounts owed by the Company of $8,202, which consisted primarily of deferred production royalties. The newly acquired interests in the mineral reserves were leased and/or subleased by Thoroughbred to the Company in exchange for a production royalty. Similar to previous reserve transfers, this transaction was accounted for as a financing arrangement and an additional long-term obligation to Thoroughbred of $8,202 was recognized in the fourth quarter of 2014.
The percentage interests in the land and mineral reserves transferred in each of the transactions occurring on October 1, 2014 were based on fair values determined by a third-party specialist. At the conclusion of these transactions, Thoroughbreds undivided interest in certain of the Companys leased and owned land and mineral reserves in Muhlenberg and Ohio counties was 49.28%.
As of March 31, 2015 and December 31, 2014, the outstanding long-term obligation to related party totaled $110,941 and $110,713, respectively. Interest expense recognized for the three months ended March 31, 2015 and 2014 associated with the long-term obligation to related party was $2,497 and $1,827, respectively. Based on the current mine plan, the effective interest rate of the obligation was adjusted to 9.3% beginning January 1, 2015.
Lease of Coal Reserves
In February 2011, Thoroughbred entered into a lease and sublease agreement with the Company relating to its Elk Creek reserves and granted the Company a license to mine coal on those properties. The terms of this agreement mirror those of the lease agreements associated with the jointly owned reserves between the Company and Thoroughbred. Total production royalties owed from mining of the Elk Creek reserves, where the Companys Kronos underground mine resides, for the three months ended March 31, 2015 and 2014 totaled $2,001 and $2,024, respectively.
In February 2014, the Company entered into an additional lease and/or sublease with Thoroughbred for certain mineral reserves located in Muhlenberg and McLean Counties of Kentucky, contiguous to its existing reserves, in exchange for a production royalty. Total proven and probable mineral reserves included as part of the transaction was approximately 198 million tons. The initial term of the lease is ten years, with an automatic extension of up to ten years. No mining of this reserve had commenced as of March 31, 2015.
Administrative Services Agreements
Effective as of January 1, 2011, the Company entered into an Administrative Services Agreement with Thoroughbred and its general partner, ECGP, pursuant to which the Company agreed to provide Thoroughbred with general administrative and management services, including, but not limited to, human resources, information technology, financial and accounting services and legal services. The administrative service fee, which is adjusted annually, is approved by the conflicts committee of the board of directors. As consideration for the use of the Companys employees and services, and for certain shared fixed costs, Thoroughbred paid the Company $300 and $254 for the three months ended March 31, 2015 and 2014, respectively.
Other
In 2006 and 2007, the Company entered into overriding royalty agreements with a current and a former executive employee to compensate them $0.05/ton of coal mined and sold from properties owned by certain subsidiaries of the Company. The agreements remain in effect for the later of 20 years from the date of the agreement or until all salable coal has been extracted. Both royalty
8
Table of Contents
Armstrong Energy, Inc. and Subsidiaries
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
agreements transfer with the property regardless of ownership or lease status. The royalties are payable the month following the sale of coal mined from the specified properties. The Company accounts for these royalty arrangements as expense in the period in which the coal is sold. Expense recorded in the three months ended March 31, 2015 and 2014, was $165 and $202, respectively.
6. LONG-TERM DEBT
The Companys total indebtedness consisted of the following:
Type |
March 31, 2015 |
December 31, 2014 |
||||||
11.75% Senior Secured Notes due 2019 |
$ | 194,775 | $ | 194,570 | ||||
Senior Secured Credit Facility |
| | ||||||
Other |
8,242 | 9,319 | ||||||
|
|
|
|
|||||
203,017 | 203,889 | |||||||
Less: current maturities |
4,580 | 4,929 | ||||||
|
|
|
|
|||||
Total long-term debt |
$ | 198,437 | $ | 198,960 | ||||
|
|
|
|
Senior Secured Notes due 2019
On December 21, 2012, the Company completed a $200,000 offering of 11.75% Senior Secured Notes due 2019 (the Notes). The Notes were issued at an original issue discount (OID) of 96.567%. The OID was recorded on the Companys balance sheet as a component of long-term debt, and is being amortized to interest expense over the life of the Notes. As of March 31, 2015 and December 31, 2014, the unamortized OID was $5,225 and $5,430, respectively. Interest on the Notes is due semiannually on June 15 and December 15 of each year. The Company used $123,698 of the proceeds from this issuance to prepay and terminate its previous Senior Secured Credit Facility, including accrued and unpaid interest. In addition, the Company used the proceeds to pay fees and expenses of $8,358 related to the Notes offering.
The Company and certain wholly-owned subsidiaries of the Company (the Guarantor Subsidiaries) entered into a registration rights agreement (the Registration Rights Agreement) in connection with the issuance and sale of the Notes. Pursuant to the Registration Rights Agreement, the Company and the Guarantor Subsidiaries agreed to file a registration statement with the SEC to register an exchange offer pursuant to which the Company offered to exchange a like aggregate principal amount of senior notes identical in all material respects to the Notes, except for terms relating to transfer restrictions, for any or all of the outstanding Notes. The exchange offer was completed in November 2013.
2012 Credit Facility
Concurrently with the closing of the Notes offering on December 21, 2012, the Company entered into a new asset based revolving credit facility (the 2012 Credit Facility). The 2012 Credit Facility provides for a five-year $50,000 revolving credit facility that will expire on December 21, 2017. Borrowings under the 2012 Credit Facility may not exceed a borrowing base, as defined within the 2012 Credit Facility agreement. In addition, the 2012 Credit Facility includes a $10,000 letter of credit sub-facility and a $5,000 swingline loan sub-facility. As of March 31, 2015 and December 31, 2014, there were no borrowings outstanding under the 2012 Credit Facility, and the Company had $21,822 available for borrowing under the 2012 Credit Facility at March 31, 2015. The Company incurred $1,198 of deferred financing fees related to the 2012 Credit Facility that have been capitalized and are being amortized to interest expense over the life of the 2012 Credit Facility.
7. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company measures the fair value of assets and liabilities using a three-tier fair value hierarchy which prioritizes the inputs used in measuring fair value as follows: Level 1observable inputs such as quoted prices in active markets; Level 2inputs, other than quoted market prices in active markets, which are observable, either directly or indirectly; and Level 3valuations derived from valuation techniques in which one or more significant inputs are unobservable. In addition, the Company may use various valuation techniques including the market approach, using comparable market prices; the income approach, using present value of future income or cash flow; and the cost approach, using the replacement cost of assets.
9
Table of Contents
Armstrong Energy, Inc. and Subsidiaries
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Companys financial instruments consist of cash equivalents, accounts receivable, long-term debt, and other long-term obligations. For cash equivalents, accounts receivable and other long-term obligations, the carrying amounts approximate fair value due to the short maturity and financial nature of the balances. The estimated fair market values of the Companys Notes, which was determined using level 2 inputs, and long-term obligation to related party, which was determined using level 3 inputs, are as follows:
March 31, 2015 | December 31, 2014 | |||||||||||||||
Fair Value |
Carrying Value |
Fair Value |
Carrying Value |
|||||||||||||
11.75% Senior Secured Notes due 2019(1) |
$ | 186,000 | $ | 194,775 | $ | 206,000 | $ | 194,570 | ||||||||
Long-term obligation to related party |
117,870 | 110,941 | 115,731 | 110,713 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 303,870 | $ | 305,716 | $ | 321,731 | $ | 305,283 | ||||||||
|
|
|
|
|
|
|
|
(1) | The carrying value of the Notes is net of the unamortized OID as of March 31, 2015 and December 31, 2014, respectively. |
The fair value of the Notes is based on quoted market prices, while the fair value of the long-term obligation to related party was based on estimated cash flows discounted to their present value.
8. INCOME TAXES
The Company has not recognized certain income tax benefits, as it does not believe it is more likely than not it will be able to realize its net deferred tax assets. The Company has, therefore, established a valuation allowance against its net deferred tax assets as of March 31, 2015 and December 31, 2014. Based on the anticipated reversals of its deferred tax assets and deferred tax liabilities, the Company has concluded a valuation allowance is necessary only for the excess of deferred tax assets over deferred tax liabilities.
9. EMPLOYEE BENEFIT PLANS
Effective January 1, 2013, the Company began providing certain health care benefits, including the reimbursement of a portion of out-of-pocket costs associated with insurance coverage, to qualifying salaried and hourly retirees and their dependents. Plan coverage for reimbursements will be provided to future hourly and salaried retirees in accordance with the plan document. The Companys funding policy with respect to the plan is to fund the cost of all postretirement benefits as they are paid.
Net periodic postretirement benefit cost included the following components:
Three months ended March 31, |
||||||||
2015 | 2014 | |||||||
Service cost for benefits earned |
$ | 304 | $ | 258 | ||||
Interest cost on accumulated postretirement benefit obligation |
30 | 22 | ||||||
Amortization of prior service cost |
26 | 26 | ||||||
|
|
|
|
|||||
Net periodic postretirement cost |
$ | 360 | $ | 306 | ||||
|
|
|
|
10
Table of Contents
Armstrong Energy, Inc. and Subsidiaries
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. ACCUMULATED OTHER COMPREHENSIVE LOSS
Changes in accumulated other comprehensive loss, net of tax, for the three months ended March 31, 2015 consisted of the following:
Postretirement Benefit Plan and Other Employee Benefit Obligations |
Accumulated Other Comprehensive Loss |
|||||||
Balance as of December 31, 2014 |
$ | (3,741 | ) | $ | (3,741 | ) | ||
Other comprehensive loss before reclassifications |
| | ||||||
Amounts reclassified from accumulated other comprehensive loss |
105 | 105 | ||||||
|
|
|
|
|||||
Net current-period accumulated other comprehensive loss |
(3,636 | ) | (3,636 | ) | ||||
|
|
|
|
|||||
Balance as of March 31, 2015 |
$ | (3,636 | ) | $ | (3,636 | ) | ||
|
|
|
|
The following is a summary of reclassifications out of accumulated other comprehensive loss for the three months ended March 31, 2015 and 2014:
Details about Accumulated Other Comprehensive Loss Components |
Affected Line Item in the Condensed Consolidated Statement of Operations |
Amounts Reclassified from Accumulated Other Comprehensive Loss For the Three Months Ended March 31, |
||||||||
2015 | 2014 | |||||||||
Amortization of prior service cost associated with postretirement benefit plan and other employee benefit obligations |
Cost of coal sales | $ | (105 | ) | $ | (26 | ) | |||
|
|
|
|
|||||||
(105 | ) | (26 | ) | |||||||
Income taxes |
| | ||||||||
|
|
|
|
|||||||
Total reclassifications |
$ | (105 | ) | $ | (26 | ) | ||||
|
|
|
|
11. CLOSURE OF LEWIS CREEK UNDERGROUND MINE
The Companys Lewis Creek underground mine, which produces coal from the West Kentucky #9 seam, has experienced significant operating inefficiencies since July 2013 due to the geological conditions of the portion of the reserve being mined. As a result of the ongoing mining difficulties, a final decision was made in August 2014 not to continue advancing under the current mine plan, but rather to retreat and mine only in the eastern portion of the reserve.
The Company completed mining of the Lewis Creek underground mine in March 2015 and has begun extracting the equipment, which will be utilized at its other mining operations in the future. As a result of the closure, the Company accelerated depreciation of the remaining net book value of the capitalized costs associated with the original development of the mine. Total expense recognized during the first quarter of 2015 to write-off the remaining asset was approximately $6,318, which is included as a component of depreciation, depletion, and amortization expense in the condensed consolidated statement of operations for the three months ended March 31, 2015.
11
Table of Contents
Armstrong Energy, Inc. and Subsidiaries
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12. COMMITMENTS AND CONTINGENCIES
The Company is subject to various market, operational, financial, regulatory, and legislative risks. Numerous federal, state, and local governmental permits and approvals are required for mining operations. Federal and state regulations require regular monitoring of mines and other facilities to document compliance. Monetary penalties of $1,928 and $1,747 related to Mine Safety and Health Administration fines were accrued as of March 31, 2015 and December 31, 2014, respectively.
The Company is involved from time to time in various legal matters arising in the ordinary course of business. In the opinion of management, the resolution of these matters will not have a material adverse effect on the Companys consolidated cash flows, results of operations or financial condition.
Coal Sales Contracts
The Company has historically sold the majority of its coal under multi-year supply agreements of varying duration. These contracts typically have specific volume and pricing arrangements for each year of the agreement, which allows customers to secure a supply for their future needs and provides the Company with greater predictability of sales volume and sales prices. Quantities sold under some of these contracts may vary from year to year within certain limits at the option of the customer or the Company. The remaining terms of the Companys long-term contracts range from one to five years. The Company, via contractual agreements, has committed volumes of sales in 2015 of approximately 8.4 million tons.
13. SUPPLEMENTAL GUARANTOR/NON-GUARANTOR FINANCIAL INFORMATION
In accordance with the indenture governing the Notes, the Guarantor Subsidiaries have fully and unconditionally guaranteed the Notes, on a joint and several basis, subject to certain customary release provisions. Separate financial statements and other disclosures concerning the Guarantor Subsidiaries are not presented because management believes that such information is not material to the holders of the Notes. The following historical financial statement information is provided for the Guarantor Subsidiaries. The non-guarantor subsidiaries are considered to be minor as the term is defined in Rule 3-10 of Regulation S-X promulgated by the SEC, and the financial position, results of operations, and cash flows of the non-guarantor subsidiaries are, therefore, included in the condensed financial data of the Guarantor Subsidiaries.
12
Table of Contents
Armstrong Energy, Inc. and Subsidiaries
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Supplemental Condensed Consolidating Balance Sheets
March 31, 2015 | ||||||||||||||||
Parent / Issuer |
Guarantor Subsidiaries |
Eliminations | Consolidated | |||||||||||||
ASSETS | ||||||||||||||||
Current assets: |
||||||||||||||||
Cash and cash equivalents |
$ | | $ | 61,812 | $ | | $ | 61,812 | ||||||||
Accounts receivable |
| 23,730 | | 23,730 | ||||||||||||
Inventories |
| 12,403 | | 12,403 | ||||||||||||
Prepaid and other assets |
199 | 1,644 | | 1,843 | ||||||||||||
Deferred income taxes |
951 | | | 951 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total current assets |
1,150 | 99,589 | | 100,739 | ||||||||||||
Property, plant, equipment, and mine development, net |
14,910 | 384,761 | | 399,671 | ||||||||||||
Investments |
| 3,408 | | 3,408 | ||||||||||||
Investments in subsidiaries |
190,576 | | (190,576 | ) | | |||||||||||
Intercompany receivables |
94,043 | (94,043 | ) | | | |||||||||||
Other non-current assets |
8,606 | 16,378 | | 24,984 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total assets |
$ | 309,285 | $ | 410,093 | $ | (190,576 | ) | $ | 528,802 | |||||||
|
|
|
|
|
|
|
|
|||||||||
LIABILITIES AND STOCKHOLDERS EQUITY | ||||||||||||||||
Current liabilities: |
||||||||||||||||
Accounts payable |
$ | 100 | $ | 28,353 | $ | | $ | 28,453 | ||||||||
Accrued and other liabilities |
7,101 | 18,125 | | 25,226 | ||||||||||||
Current portion of capital lease obligations |
| 2,254 | | 2,254 | ||||||||||||
Current maturities of long-term debt |
| 4,580 | | 4,580 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total current liabilities |
7,201 | 53,312 | | 60,513 | ||||||||||||
Long-term debt, less current maturities |
194,775 | 3,662 | | 198,437 | ||||||||||||
Long-term obligation to related party |
| 110,941 | | 110,941 | ||||||||||||
Related party payables, net |
(3,511 | ) | 25,573 | | 22,062 | |||||||||||
Asset retirement obligations |
| 16,684 | | 16,684 | ||||||||||||
Long-term portion of capital lease obligations |
| 854 | | 854 | ||||||||||||
Deferred income taxes |
951 | | | 951 | ||||||||||||
Other non-current liabilities |
126 | 8,468 | | 8,594 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total liabilities |
199,542 | 219,494 | | 419,036 | ||||||||||||
Stockholders equity: |
||||||||||||||||
Armstrong Energy, Inc.s equity |
109,743 | 190,576 | (190,576 | ) | 109,743 | |||||||||||
Non-controlling interest |
| 23 | | 23 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total stockholders equity |
109,743 | 190,599 | (190,576 | ) | 109,766 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total liabilities and stockholders equity |
$ | 309,285 | $ | 410,093 | $ | (190,576 | ) | $ | 528,802 | |||||||
|
|
|
|
|
|
|
|
13
Table of Contents
Armstrong Energy, Inc. and Subsidiaries
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2014 | ||||||||||||||||
Parent / Issuer |
Guarantor Subsidiaries |
Eliminations | Consolidated | |||||||||||||
ASSETS | ||||||||||||||||
Current assets: |
||||||||||||||||
Cash and cash equivalents |
$ | | $ | 59,518 | $ | | $ | 59,518 | ||||||||
Accounts receivable |
| 21,799 | | 21,799 | ||||||||||||
Inventories |
| 10,552 | | 10,552 | ||||||||||||
Prepaid and other assets |
62 | 2,900 | | 2,962 | ||||||||||||
Deferred income taxes |
735 | | | 735 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total current assets |
797 | 94,769 | | 95,566 | ||||||||||||
Property, plant, equipment, and mine development, net |
14,648 | 394,092 | | 408,740 | ||||||||||||
Investments |
| 3,372 | | 3,372 | ||||||||||||
Investments in subsidiaries |
199,435 | | (199,435 | ) | | |||||||||||
Intercompany receivables |
96,755 | (96,755 | ) | | | |||||||||||
Other non-current assets |
8,980 | 15,789 | | 24,769 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total assets |
$ | 320,615 | $ | 411,267 | $ | (199,435 | ) | $ | 532,447 | |||||||
|
|
|
|
|
|
|
|
|||||||||
LIABILITIES AND STOCKHOLDERS EQUITY | ||||||||||||||||
Current liabilities: |
||||||||||||||||
Accounts payable |
$ | 100 | $ | 27,493 | $ | | $ | 27,593 | ||||||||
Accrued and other liabilities |
3,456 | 13,661 | | 17,117 | ||||||||||||
Current portion of capital lease obligations |
| 2,426 | | 2,426 | ||||||||||||
Current maturities of long-term debt |
| 4,929 | | 4,929 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total current liabilities |
3,556 | 48,509 | | 52,065 | ||||||||||||
Long-term debt, less current maturities |
194,570 | 4,390 | | 198,960 | ||||||||||||
Long-term obligation to related party |
| 110,713 | | 110,713 | ||||||||||||
Related party payables, net |
(3,211 | ) | 21,383 | | 18,172 | |||||||||||
Asset retirement obligations |
| 17,379 | | 17,379 | ||||||||||||
Long-term portion of capital lease obligations |
| 1,358 | | 1,358 | ||||||||||||
Deferred income taxes |
735 | | | 735 | ||||||||||||
Other non-current liabilities |
131 | 8,077 | | 8,208 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total liabilities |
195,781 | 211,809 | | 407,590 | ||||||||||||
Stockholders equity: |
||||||||||||||||
Armstrong Energy, Inc.s equity |
124,834 | 199,435 | (199,435 | ) | 124,834 | |||||||||||
Non-controlling interest |
| 23 | | 23 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total stockholders equity |
124,834 | 199,458 | (199,435 | ) | 124,857 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total liabilities and stockholders equity |
$ | 320,615 | $ | 411,267 | $ | (199,435 | ) | $ | 532,447 | |||||||
|
|
|
|
|
|
|
|
14
Table of Contents
Armstrong Energy, Inc. and Subsidiaries
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Supplemental Condensed Consolidated Statements of Operations
Three Months Ended March 31, 2015 | ||||||||||||||||
Parent / Issuer |
Guarantor Subsidiaries |
Eliminations | Consolidated | |||||||||||||
Revenue |
$ | | $ | 96,335 | $ | | $ | 96,335 | ||||||||
Costs and Expenses: |
||||||||||||||||
Cost of coal sales, exclusive of items shown separately below |
| 78,830 | | 78,830 | ||||||||||||
Production royalty to related party |
| 2,001 | | 2,001 | ||||||||||||
Depreciation, depletion, and amortization |
505 | 16,399 | | 16,904 | ||||||||||||
Asset retirement obligation expenses |
| 867 | | 867 | ||||||||||||
General and administrative expenses |
181 | 4,458 | | 4,639 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Operating loss |
(686 | ) | (6,220 | ) | | (6,906 | ) | |||||||||
Other income (expense): |
||||||||||||||||
Interest expense, net |
(5,709 | ) | (2,668 | ) | | (8,377 | ) | |||||||||
Other, net |
| 29 | | 29 | ||||||||||||
Loss from investment in subsidiaries |
(8,859 | ) | | 8,859 | | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Loss before income taxes |
(15,254 | ) | (8,859 | ) | 8,859 | (15,254 | ) | |||||||||
Income tax provision |
| | | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net loss |
(15,254 | ) | (8,859 | ) | 8,859 | (15,254 | ) | |||||||||
Less: income attributable to non-controlling interests |
| | | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net loss attributable to common stockholders |
$ | (15,254 | ) | $ | (8,859 | ) | $ | 8,859 | $ | (15,254 | ) | |||||
|
|
|
|
|
|
|
|
|||||||||
Three Months Ended March 31, 2014 | ||||||||||||||||
Parent / Issuer |
Guarantor Subsidiaries |
Eliminations | Consolidated | |||||||||||||
Revenue |
$ | | $ | 110,866 | $ | | $ | 110,866 | ||||||||
Costs and Expenses: |
||||||||||||||||
Cost of coal sales, exclusive of items shown separately below |
51 | 90,068 | | 90,119 | ||||||||||||
Production royalty to related party |
| 2,024 | | 2,024 | ||||||||||||
Depreciation, depletion, and amortization |
476 | 9,731 | | 10,207 | ||||||||||||
Asset retirement obligation expenses |
| 508 | | 508 | ||||||||||||
General and administrative expenses |
920 | 4,326 | | 5,246 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Operating (loss) income |
(1,447 | ) | 4,209 | | 2,762 | |||||||||||
Other income (expense): |
||||||||||||||||
Interest expense, net |
(6,248 | ) | (1,996 | ) | | (8,244 | ) | |||||||||
Other, net |
| 182 | | 182 | ||||||||||||
Income from investment in subsidiaries |
2,395 | | (2,395 | ) | | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
(Loss) income before income taxes |
(5,300 | ) | 2,395 | (2,395 | ) | (5,300 | ) | |||||||||
Income tax provision |
| | | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net (loss) income |
(5,300 | ) | 2,395 | (2,395 | ) | (5,300 | ) | |||||||||
Less: income attributable to non-controlling interests |
| | | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net (loss) income attributable to common stockholders |
$ | (5,300 | ) | $ | 2,395 | $ | (2,395 | ) | $ | (5,300 | ) | |||||
|
|
|
|
|
|
|
|
15
Table of Contents
Armstrong Energy, Inc. and Subsidiaries
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Supplemental Condensed Consolidated Statements of Comprehensive Income (Loss)
Three Months Ended March 31, 2015 | ||||||||||||||||
Parent / Issuer |
Guarantor Subsidiaries |
Eliminations | Consolidated | |||||||||||||
Net loss |
$ | (15,254 | ) | $ | (8,859 | ) | $ | 8,859 | $ | (15,254 | ) | |||||
Other comprehensive income: |
||||||||||||||||
Postretirement benefit plan and other employee benefit obligation |
| 105 | | 105 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Other comprehensive income |
| 105 | | 105 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Comprehensive loss |
(15,254 | ) | (8,754 | ) | 8,859 | (15,149 | ) | |||||||||
Less: comprehensive income (loss) attributable to non-controlling interests |
| | | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Comprehensive loss attributable to common stockholders |
$ | (15,254 | ) | $ | (8,754 | ) | $ | 8,859 | $ | (15,149 | ) | |||||
|
|
|
|
|
|
|
|
|||||||||
Three Months Ended March 31, 2014 | ||||||||||||||||
Parent / Issuer |
Guarantor Subsidiaries |
Eliminations | Consolidated | |||||||||||||
Net (loss) income |
$ | (5,300 | ) | $ | 2,395 | $ | (2,395 | ) | $ | (5,300 | ) | |||||
Other comprehensive income: |
||||||||||||||||
Postretirement benefit plan |
| 26 | | 26 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Other comprehensive income |
| 26 | | 26 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Comprehensive (loss) income |
(5,300 | ) | 2,421 | (2,395 | ) | (5,274 | ) | |||||||||
Less: comprehensive income (loss) attributable to non-controlling interests |
| | | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Comprehensive (loss) income attributable to common stockholders |
$ | (5,300 | ) | $ | 2,421 | $ | (2,395 | ) | $ | (5,274 | ) | |||||
|
|
|
|
|
|
|
|
16
Table of Contents
Armstrong Energy, Inc. and Subsidiaries
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Supplemental Condensed Consolidating Statements of Cash Flows
Three Months Ended March 31, 2015 | ||||||||||||
Parent / Issuer |
Guarantor Subsidiaries |
Consolidated | ||||||||||
Cash Flows from Operating Activities: |
||||||||||||
Net cash (used in) provided by operating activities: |
$ | (1,946 | ) | $ | 14,332 | $ | 12,386 | |||||
Cash Flows from Investing Activities: |
||||||||||||
Investment in property, plant, equipment, and mine development |
(767 | ) | (7,844 | ) | (8,611 | ) | ||||||
Proceeds from disposal of fixed assets |
| 475 | 475 | |||||||||
|
|
|
|
|
|
|||||||
Net cash used in investing activities |
(767 | ) | (7,369 | ) | (8,136 | ) | ||||||
Cash Flows from Financing Activities: |
||||||||||||
Payment on capital lease obligations |
| (677 | ) | (677 | ) | |||||||
Payment of long-term debt |
| (1,279 | ) | (1,279 | ) | |||||||
Transactions with affiliates, net |
2,713 | (2,713 | ) | | ||||||||
|
|
|
|
|
|
|||||||
Net cash provided by (used in) financing activities |
2,713 | (4,669 | ) | (1,956 | ) | |||||||
|
|
|
|
|
|
|||||||
Net change in cash and cash equivalents |
| 2,294 | 2,294 | |||||||||
Cash and cash equivalents, at the beginning of the period |
| 59,518 | 59,518 | |||||||||
|
|
|
|
|
|
|||||||
Cash and cash equivalents, at the end of the period |
$ | | $ | 61,812 | $ | 61,812 | ||||||
|
|
|
|
|
|
|||||||
Three Months Ended March 31, 2014 | ||||||||||||
Parent / Issuer |
Guarantor Subsidiaries |
Consolidated | ||||||||||
Cash Flows from Operating Activities: |
||||||||||||
Net cash (used in) provided by operating activities: |
$ | (2,658 | ) | $ | 11,138 | $ | 8,480 | |||||
Cash Flows from Investing Activities: |
||||||||||||
Investment in property, plant, equipment, and mine development |
(280 | ) | (2,868 | ) | (3,148 | ) | ||||||
|
|
|
|
|
|
|||||||
Net cash used in investing activities |
(280 | ) | (2,868 | ) | (3,148 | ) | ||||||
Cash Flows from Financing Activities: |
||||||||||||
Payment on capital lease obligations |
| (893 | ) | (893 | ) | |||||||
Payment of long-term debt |
| (2,876 | ) | (2,876 | ) | |||||||
Repurchase of employee stock relinquished for tax withholdings |
(87 | ) | | (87 | ) | |||||||
Transactions with affiliates, net |
3,025 | (3,025 | ) | | ||||||||
|
|
|
|
|
|
|||||||
Net cash provided by (used in) financing activities |
2,938 | (6,794 | ) | (3,856 | ) | |||||||
|
|
|
|
|
|
|||||||
Net change in cash and cash equivalents |
| 1,476 | 1,476 | |||||||||
Cash and cash equivalents, at the beginning of the period |
| 51,632 | 51,632 | |||||||||
|
|
|
|
|
|
|||||||
Cash and cash equivalents, at the end of the period |
$ | | $ | 53,108 | $ | 53,108 | ||||||
|
|
|
|
|
|
14. SUBSEQUENT EVENT
On May 1, 2015, the Company sold a 12.10% undivided interest in certain leased and owned land and mineral reserves to Thoroughbred in exchange for Thoroughbred forgiving amounts owed by the Company of $18,172, which consisted primarily of deferred production royalties. The newly acquired interests in the mineral reserves were leased and/or subleased by Thoroughbred to the Company in exchange for a production royalty. Similar to previous reserve transfers, as described in Note 5, this transaction was accounted for as a financing arrangement and an additional long-term obligation to Thoroughbred of $18,172 will be recognized in the second quarter of 2015.
The percentage interest in the land and mineral reserves sold was based on a fair value determined by a third-party specialist. As a result of this transaction, Thoroughbreds undivided interest in certain of the Companys leased and owned land and mineral reserves in Muhlenberg and Ohio counties is increased to 61.38%.
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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of financial condition and results of operations should be read in conjunction with our unaudited consolidated financial statements and related notes included in Item 1 of Part I of this Quarterly Report on Form 10-Q and with our audited consolidated financial statements and related notes included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (the SEC) on March 26, 2015.
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
Various statements contained in this quarterly report, including those that express a belief, expectation or intention, as well as those that are not statements of historical fact, are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, (the Securities Act) and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act). These forward-looking statements may include projections and estimates concerning the timing and success of specific projects and our future production, revenues, income and capital spending. Our forward-looking statements are generally accompanied by words such as estimate, project, predict, believe, expect, anticipate, potential, plan, goal or other words that convey the uncertainty of future events or outcomes. The forward-looking statements in this quarterly report speak only as of the date of this quarterly report; we disclaim any obligation to update these statements unless required by law, and we caution you not to rely on them unduly. We have based these forward-looking statements on our current expectations and assumptions about future events. While our management considers these expectations and assumptions to be reasonable, they are inherently subject to significant business, economic, competitive, regulatory and other risks, contingencies and uncertainties, most of which are difficult to predict and many of which are beyond our control. These and other important factors may cause our actual results, performance or achievements to differ materially from any future results, performance or achievements expressed or implied by these forward-looking statements. These risks, contingencies and uncertainties include, but are not limited to, the following:
| market demand for coal and electricity; |
| geologic conditions, weather and other inherent risks of coal mining that are beyond our control; |
| competition within our industry and with producers of competing energy sources; |
| excess production and production capacity; |
| our ability to acquire or develop coal reserves in an economically feasible manner; |
| inaccuracies in our estimates of our coal reserves; |
| availability and price of mining and other industrial supplies, including steel-based supplies, diesel fuel, rubber tires and explosives; |
| the continued weakness in global economic conditions or in any industry in which our customers operate, or sustained uncertainty in financial markets, which may cause conditions we cannot predict; |
| coal users switching to other fuels in order to comply with various environmental standards related to coal combustion; |
| volatility in the capital and credit markets; |
| availability of skilled employees and other workforce factors; |
| our ability to collect payments from our customers; |
| defects in title or the loss of a leasehold interest; |
| railroad, barge, truck and other transportation performance costs; |
| our ability to secure new coal supply arrangements or to renew existing coal supply arrangements; |
| the deferral of contracted shipments of coal by our customers; |
| our ability to service our outstanding indebtedness; |
| our ability to comply with the restrictions imposed by our revolving credit facility, the indenture governing our notes and other financing arrangements; |
| the availability and cost of surety bonds; |
| our ability to obtain and renew various permits, including permits authorizing the disposition of certain mining waste; |
| existing and future legislation and regulations affecting both our coal mining operations and our customers coal usage, governmental policies and taxes, including those aimed at reducing emissions of elements such as mercury, sulfur dioxide, nitrogen oxides, or toxic gases, such as hydrogen chloride, particulate matter or greenhouse gases; |
| the accuracy of our estimates of reclamation and other mine closure obligations; |
| our ability to attract and retain key management personnel; and |
| efforts to organize our workforce for representation under a collective bargaining agreement. |
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When considering these forward-looking statements, you should keep in mind the cautionary statements in this document and in our other SEC filings, including the more detailed discussion of these factors and other factors that could affect our results included in Risk Factors in our Annual Report on Form 10-K filed with the SEC on March 26, 2015.
Overview
Armstrong Energy, Inc. (together with its subsidiaries, we or the Company) is a producer of low chlorine, high sulfur thermal coal from the Illinois Basin, with both surface and underground mines. We market our coal primarily to proximate and investment grade electric utility companies as fuel for their steam-powered generators. Based on 2014 production, we are the sixth largest producer in the Illinois Basin and the second largest in Western Kentucky. We were formed in 2006 to acquire and develop a large coal reserve holding. We commenced production in the second quarter of 2008 and currently operate seven mines, including four surface and three underground. We control approximately 563 million tons of proven and probable coal reserves. We also own and operate three coal processing plants, which support our mining operations. From our reserves, we mine coal from multiple seams that, in combination with our coal processing facilities, enhance our ability to meet customer requirements for blends of coal with different characteristics. The locations of our coal reserves and operations, adjacent to the Green River, together with our river dock coal handling and rail loadout facilities, allow us to optimize coal blending and handling, and provide our customers with rail, barge and truck transportation options.
We market our coal primarily to large utilities with coal-fired, base-load, scrubbed power plants under multi-year coal supply agreements. Our multi-year coal supply agreements usually have specific volume and pricing arrangements for each year of the agreement. These agreements allow customers to secure a supply for their future needs and provide us with greater predictability of sales volume and sales prices. At March 31, 2015, we had coal supply agreements with terms ranging from one to five years. As of March 31, 2015, we are contractually committed to sell approximately 8.4 million tons of coal in 2015. The average price per committed ton for 2015 is $47.67.
Our principal expenses related to the production of coal are labor and benefits, equipment, materials and supplies (explosives, diesel fuel and electricity), maintenance, royalties and state and federal severance taxes. Unlike some of our competitors, we employ a completely non-union workforce. Many of the benefits of our non-union workforce are related to higher productivity and are not necessarily reflected in our direct costs. In addition, while we typically do not pay our customers transportation costs, they may be substantial and are often the determining factor in a coal consumers contracting decision. The location of our coal reserves and operations, adjacent to the Green and Ohio Rivers, together with our river dock coal handling and rail loadout facilities, allow us to optimize coal blending and handling and provide our customers with rail, barge and truck transportation options.
Recent Developments
Revisions to Mine Plans
Our Lewis Creek underground mine, which produces coal from the West Kentucky #9 seam, has experienced significant operating inefficiencies since July 2013 due to the geological conditions of the portion of the reserve being mined. As a result of the ongoing mining difficulties, a final decision was made in August 2014 not to continue advancing under the current mine plan, but rather to retreat and mine only in the eastern portion of the reserve.
We completed mining of the Lewis Creek underground mine in March 2015 and have begun extracting the equipment, which will be utilized at our other mining operations in the future. As a result of the closure, we accelerated depreciation of the remaining net book value of the capitalized costs associated with the original development of the mine. Total expense recognized during the first quarter of 2015 to write-off the remaining asset was approximately $6.3 million, which is included as a component of depreciation, depletion, and amortization (DD&A) expense in the condensed consolidated statement of operations for the three months ended March 31, 2015.
In addition to the above, we periodically adjust our mine plans based on changes in current market conditions and the anticipated cost structure at each of our mines. During the first quarter of 2015, we reevaluated the mine plans for certain of our surface operations and, as a result, determined the estimated useful lives of a portion of the machinery and equipment had been reduced based on the expected future utilization of these assets. As such, we have reduced the depreciable lives of the identified machinery and equipment which increased depreciation expense by approximately $0.6 million for the three months ended March 31, 2015 and will continue to increase depreciation expense on a prospective basis.
Sale of Coal Reserves
On May 1, 2015, we sold a 12.10% undivided interest in certain leased and owned land and mineral reserves to our affiliate, Thoroughbred Resources, L.P. (Thoroughbred), in exchange for Thoroughbred forgiving amounts owed by the Company of $18.2 million, which consisted primarily of deferred production royalties. The newly acquired interests in the mineral reserves were leased and/or subleased by Thoroughbred to us in exchange for a production royalty. Similar to previous reserve transfers, this transaction was accounted for as a financing arrangement, and an additional long-term obligation to Thoroughbred of $18.2 million will be recognized in the second quarter of 2015.
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The percentage interest in the land and mineral reserves sold was based on a fair value determined by a third-party specialist. As a result of this transaction, Thoroughbreds undivided interest in certain of the Companys leased and owned land and mineral reserves in Muhlenberg and Ohio counties increased to 61.38%. See Note 5, Related Party Transactions, to the unaudited condensed consolidated financial statements included in this report and Item 13Certain Relationships and Related Party Transactions, and Director Independence in our Annual Report on Form 10-K filed with the SEC on March 26, 2015 for additional information concerning our leases with related parties.
Results of Operations
Non-GAAP Financial Information
Adjusted EBITDA, as presented in this Quarterly Report on Form 10-Q, is a supplemental measure of our performance that is not required by, or presented in accordance with, U.S. generally accepted accounting (GAAP). It is not a measurement of our financial performance under GAAP and should not be considered as an alternative to net income (loss) or any other performance measures derived in accordance with GAAP or as an alternative to cash flows from operating activities as measures of our liquidity.
We define Adjusted EBITDA as net income (loss) before deducting net interest expense, income taxes, depreciation, depletion and amortization, asset retirement obligation expense, non-cash production royalty for related party, loss on settlement of interest rate swap, loss on deferment of equity offering, gain on settlement of asset retirement obligations, non-cash stock compensation expense, non-cash employee benefit expense, non-cash charges related to non-recourse notes, gain on deconsolidation, and (gain) loss on extinguishment of debt. We caution investors that amounts presented in accordance with our definition of Adjusted EBITDA may not be comparable to similar measures disclosed by other issuers, because not all issuers and analysts calculate Adjusted EBITDA in the same manner. We present Adjusted EBITDA because we consider it an important supplemental measure of our performance and believe it is useful to an investor in evaluating our Company. We also include a quantitative reconciliation of Adjusted EBITDA to the most directly comparable GAAP financial performance measure, which is net income (loss), in the sections that follow.
Three Months Ended March 31, 2015 Compared to Three Months Ended March 31, 2014
Summary
Three Months Ended March 31, |
Change | |||||||||||||||
2015 | 2014 | Amount | Percentage | |||||||||||||
(In thousands, except per ton amounts) | ||||||||||||||||
Tons of coal sold |
1,967 | 2,357 | (390 | ) | (16.5 | %) | ||||||||||
Total revenue |
$ | 96,335 | $ | 110,866 | $ | (14,531 | ) | (13.1 | %) | |||||||
Average sales price per ton |
$ | 48.98 | $ | 47.04 | $ | 1.94 | 4.1 | % | ||||||||
Cost of coal sales1 |
$ | 78,830 | $ | 90,119 | $ | (11,289 | ) | (12.5 | %) | |||||||
Average cost of sales per ton1 |
$ | 40.08 | $ | 38.24 | $ | (1.84 | ) | (4.8 | %) | |||||||
Net loss |
$ | 15,254 | $ | 5,300 | $ | (9,954 | ) | (187.8 | %) | |||||||
Adjusted EBITDA2 |
$ | 13,120 | $ | 15,746 | $ | (2,626 | ) | (16.7 | %) |
1 | Includes revenue-based production taxes and royalties; excludes depreciation, depletion, and amortization; asset retirement obligation expenses; and general and administrative costs. |
2 | Non-GAAP measure; please see definition above and reconciliation below. |
Revenue
Our coal sales revenue for the three months ended March 31, 2015 decreased by $14.5 million, or 13.1%, to $96.3 million, as compared to $110.9 million for the three months ended March 31, 2014. This decrease is attributable to an unfavorable volume variance of approximately $18.3 million year-over-year due to production and delivery issues during the current quarter resulting from the inclement weather experienced in western Kentucky. This was partially offset by a favorable price variance of approximately $3.8 million due to customer mix and higher year-over-year contract prices.
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Cost of Coal Sales
Cost of coal sales decreased 12.5% to $78.8 million in the three months ended March 31, 2015, from $90.1 million in the same period of 2014. The decline is primarily attributable to selling 0.4 million tons less in the first quarter of 2015, as compared to the same period of 2014. On a per ton basis, our cost of coal sales increased during the three months ended March 31, 2015, compared to the same period of 2014, from $38.24 per ton to $40.08 per ton. This increase in the per ton amounts is due to lower productivity and inefficiencies encountered at substantially all of our mines resulting from the adverse weather conditions experienced during the first quarter of 2015.
Production Royalty to Related Party
Production royalty to related party was $2.0 million for each of the three months ended March 31, 2015 and 2014. This amount relates to production royalties earned by our affiliate, Thoroughbred, from sales originating from our Kronos underground mine (where the mineral reserves are leased directly from Thoroughbred). Sales volume declines experienced at our Kronos underground mine during the current quarter were offset by year-over-year price increases resulting in the production royalty earned by Thoroughbred to remain unchanged from the prior year.
Depreciation, Depletion and Amortization
DD&A expense increased by $6.7 million, or 65.6%, to $16.9 million during the three months ended March 31, 2015, as compared to the same period of 2014. The increase is primarily due to the accelerated depreciation of the capitalized mine development costs associated with the Lewis Creek underground mine resulting from the closure of the mine in the first quarter of 2015 and the impact of the revision to the useful lives of a portion of the machinery and equipment associated with certain of our surface mines.
Asset Retirement Obligation Expense
Asset retirement obligation expense increased by $0.4 million, or 70.7%, to $0.9 million in the three months ended March 31, 2015, as compared to the same period of 2014. The increase is primarily attributable to changes in asset retirement cost estimates based on revisions to discount rates, reserve valuations and projected mine lives.
General and Administrative Expenses
General and administrative (G&A) expenses were $4.6 million for the three months ended March 31, 2015, which was $0.6 million, or 11.6%, lower than the three months ended March 31, 2014. The decrease in the three months ended March 31, 2015, as compared to the same period of 2014, is due primarily to lower expenses for labor and benefits ($0.9 million), partially offset by higher legal and other professional fees ($0.3 million).
Interest Expense, Net
Interest expense, net is derived from the following components:
Three Months Ended March 31, |
||||||||
2015 | 2014 | |||||||
(In thousands) | ||||||||
11.75% Senior Secured Notes due 2019 |
$ | 5,875 | $ | 5,875 | ||||
Senior Secured Credit Facility |
| | ||||||
Long-term obligation to related party |
2,497 | 1,827 | ||||||
Other, net |
5 | 542 | ||||||
|
|
|
|
|||||
Total |
$ | 8,377 | $ | 8,244 | ||||
|
|
|
|
Interest expense, net was $8.4 million for the three months ended March 31, 2015, as compared to $8.2 million for the three months ended March 31, 2014. The increase is principally attributable to an increase in the effective interest rate on the long-term obligation to related party due to revisions in the mine plan at December 31, 2014 and the increase in the principal balance of the long-term obligation to related party from the closing of the reserve transfer to Thoroughbred in October 2014, which increased the principal balance on the obligation by $6.1 million. The year-over-year increase in interest expense was partially offset by a higher amount of capitalized interest during the current quarter, as compared to 2014.
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Net Loss
Net loss for the three months ended March 31, 2015 was $15.3 million, as compared to $5.3 million for the same period of 2014. The increase in net loss is largely due to the decline in gross margin ($3.2 million) and increase in DD&A expense ($6.7 million), as discussed above.
Adjusted EBITDA
The following table reconciles Adjusted EBITDA to net loss, the most directly comparable GAAP measure:
Three Months Ended March 31, |
||||||||
2015 | 2014 | |||||||
(In thousands) | ||||||||
Net loss |
$ | (15,254 | ) | $ | (5,300 | ) | ||
Depreciation, depletion, and amortization |
16,904 | 10,207 | ||||||
Asset retirement obligation expenses |
867 | 508 | ||||||
Non-cash production royalty to related party |
2,001 | 2,024 | ||||||
Interest expense, net |
8,377 | 8,244 | ||||||
Non-cash employee benefit expense |
167 | | ||||||
Non-cash stock compensation expense |
58 | 63 | ||||||
|
|
|
|
|||||
Adjusted EBITDA |
$ | 13,120 | $ | 15,746 | ||||
|
|
|
|
Our Adjusted EBITDA for the three months ended March 31, 2015 was $13.1 million, as compared to $15.7 million for the three months ended March 31, 2014. The decrease in Adjusted EBITDA resulted primarily from a decline in gross margin as a result of the unfavorable weather conditions and resulting production inefficiencies in the three months ended March 31, 2015, as compared to the same period of 2014, partially offset by lower G&A costs, exclusive of stock compensation expense, experienced in the current quarter.
Liquidity and Capital Resources
Liquidity
Our business is capital intensive and requires substantial capital expenditures for purchasing, upgrading and maintaining equipment used in mining our reserves, as well as complying with applicable environmental laws and regulations. Our principal liquidity requirements are to finance current operations, fund capital expenditures, including acquisitions from time to time, and to service our debt. Historically, our primary sources of liquidity to meet these needs have been cash generated by our operations, borrowings under our credit facilities and contributions from our equity holders.
On December 21, 2012, we completed a $200.0 million offering of 11.75% senior secured notes due 2019 (the Notes) and received proceeds of $193.1 million, as the Notes were issued at an original issue discount of 96.567%. Interest on the Notes is due semiannually on June 15 and December 15 of each year. In connection with the offering, we prepaid and terminated our then existing senior secured credit facility. In addition, we entered into a new asset based revolving credit facility, which provides for revolving borrowings of up to $50.0 million (the 2012 Credit Facility).
The principal indicators of our liquidity are our cash on hand and availability under the 2012 Credit Facility. As of March 31, 2015, our available liquidity was $83.6 million, comprised of cash on hand of $61.8 million and $21.8 million available under the 2012 Credit Facility.
We believe that existing cash balances, cash generated from operations and borrowings under the 2012 Credit Facility will be sufficient to meet working capital requirements, anticipated capital expenditures and debt service requirements. We manage our exposure to changing commodity prices for our long-term coal contract portfolio through the use of multi-year coal supply agreements. We generally enter into fixed price, fixed volume supply contracts with terms greater than one year with customers with whom we have historically had limited collection issues. Our ability to satisfy debt service obligations, to fund planned capital expenditures, and to make acquisitions, will depend upon our future operating performance, which will be affected by prevailing economic conditions in the coal industry and financial, business and other factors, some of which are beyond our control.
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Cash Flows
The following table reflects cash flows for the applicable periods:
Three Months Ended March 31, |
||||||||
2015 | 2014 | |||||||
(In thousands) | ||||||||
Net cash provided by (used in): |
||||||||
Operating activities |
$ | 12,386 | $ | 8,480 | ||||
Investing activities |
$ | (8,136 | ) | $ | (3,148 | ) | ||
Financing activities |
$ | (1,956 | ) | $ | (3,856 | ) |
Three Months Ended March 31, 2015 Compared to three Months Ended March 31, 2014
Net cash provided by operating activities was $12.4 million for the three months ended March 31, 2015, an increase of $3.9 million from net cash provided by operating activities of $8.5 million for the same period of 2014. We experienced a decrease in operating income in the first three months of 2015 due to the lower production levels and accelerated depreciation of the capitalized mine development costs associated with the Lewis Creek underground mine, which increased DD&A expense by approximately $6.0 million in the first quarter of 2015, as compared to the same period of 2014. Positively impacting cash flows from operations for the three months ended March 31, 2015 was an increase in accounts payable and accrued liabilities of $2.1 million and accrued interest of $5.9 million due to the timing of payments, and an increase in the net related party liabilities of $4.1 million due to the deferment of amounts owed to our affiliate, Thoroughbred, including interest and royalties earned on leased reserves. Negatively impacting operating cash flows was an increase in accounts receivable due to the timing of cash receipts and an increase in inventory as coal stockpiles are at more normalized levels at March 31, 2015, as compared to the prior year-end. Cash flows from operations for the three months ended March 31, 2014 were positively impacted by an increase in accounts payable and accrued liabilities of $3.2 million and accrued interest of $5.9 million due to the timing of payments, as well as an increase in related party payables due to an increase in royalties earned by Thoroughbred. Negatively impacting operating cash flows was an increase in inventory experienced during the three months ended March 31, 2014 due to the timing of shipments, as well as an increase in accounts receivable related to the increase in revenue and the timing of cash receipts.
Net cash used in investing activities increased $5.0 million to $8.1 million for the three months ended March 31, 2015, compared to $3.1 million for the same period of 2014. The current year investment is primarily attributable to capital expenditures for equipment and mine development associated with a new underground mine at our Parkway complex, whereas the prior year investment is largely attributable to maintaining our existing fixed assets.
Net cash used in financing activities was $2.0 million for the three months ended March 31, 2015, compared to net cash used in financing activities of $3.9 million for the three months ended March 31, 2014. The current year and prior year activity relates primarily to scheduled capital lease and other long-term debt payments.
Contractual Obligations
Our contractual obligations have not changed materially from the disclosures in our Annual Report on Form 10-K filed with the SEC on March 26, 2015.
Capital Expenditures
Our mining operations require investments to expand, upgrade or enhance existing operations and to comply with environmental and safety regulations. Our anticipated total capital expenditures for 2015 are estimated to be within a range of $28.0 million to $31.0 million. Management anticipates funding capital requirements with current cash balances and cash flows provided by operations. We will continue to have significant capital requirements over the long-term, which may require us to incur debt or seek additional equity capital. The availability and cost of additional capital will depend upon our financial condition and results of operations, as well as prevailing market conditions and several other factors over which we have limited control.
Mine Development Costs
Mine development costs are capitalized until production commences, other than production incidental to the mine development process, and are amortized on a units-of-production method based on the estimated proven and probable reserves. Mine development costs represent costs incurred in establishing access to mineral reserves and include costs associated with sinking or driving shafts and underground drifts, permanent excavations, roads and tunnels. The end of the development phase and the beginning of the production phase takes place when construction of the mine for economic extraction is substantially complete. Our estimate of when construction
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of the mine for economic extraction is substantially complete is based upon a number of assumptions, such as expectations regarding the economic recoverability of reserves, the type of mine under development, and the completion of certain mine requirements, such as ventilation. Coal extracted during the development phase is incidental to the mines production capacity and is not considered to shift the mine into the production phase.
We began development of a new underground mine in the second quarter of 2014 at our Parkway mine complex to extract coal from the West Kentucky #8 seam, which is anticipated to be completed in the first half of 2015. Annual production capacity at the mine is eventually expected to be expanded to approximately 2.4 million tons. Capitalized development costs as of March 31, 2015 totaled approximately $18.9 million.
Off-Balance Sheet Arrangements
In the normal course of business, we are a party to certain off-balance sheet arrangements. These arrangements include guarantees and financial instruments with off-balance sheet risk, such as surety bonds and performance bonds. No liabilities related to these arrangements are reflected in our consolidated balance sheet, and we do not expect any material adverse effects on our financial condition, results of operations or cash flows to result from these off-balance sheet arrangements.
Federal and state laws require us to secure certain long-term obligations such as mine closure and reclamation costs and other obligations. We typically secure these obligations by using surety bonds, an off-balance sheet instrument. The use of surety bonds is less expensive for us than the alternative of posting a 100% cash bond. To the extent that surety bonds become unavailable, we would seek to secure our reclamation obligations with letters of credit, cash deposits or other suitable forms of collateral. We also post performance bonds to secure our performance of various contractual obligations.
As of March 31, 2015, we had approximately $34.9 million in surety bonds outstanding to secure the performance of our reclamation obligations, which were supported by approximately $6.0 million of cash posted as collateral.
Related Party Transactions
In the normal course of business, we engage in certain related party transactions with Thoroughbred, as well as other affiliated parties. These transactions generally include production and overriding royalties, administrative service agreements, reserve leases, and certain financing arrangements. For more information regarding our related party transactions, see Note 5, Related Party Transactions, to the unaudited condensed consolidated financial statements included in this report and Item 13Certain Relationships and Related Party Transactions, and Director Independence in our Annual Report on Form 10-K filed with the SEC on March 26, 2015.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with GAAP. In connection with the preparation of our consolidated financial statements, we are required to make assumptions and estimates about future events, and apply judgments that affect the reported amounts of assets, liabilities, revenue, expenses and the related disclosures. We base our assumptions, estimates and judgments on historical experience, current trends and other factors that management believes to be relevant at the time our consolidated financial statements are prepared. On a regular basis, we review the accounting policies, assumptions, estimates and judgments to ensure that our consolidated financial statements are presented fairly and in accordance with GAAP. However, because future events and their effects cannot be determined with certainty, actual results could differ from our assumptions and estimates, and such differences could be material.
The most significant areas requiring the use of management estimates and assumptions relate to units-of-production amortization calculations, asset retirement obligations, useful lives for depreciation of fixed assets, and the accounting for the long-term obligation to related party. For a full discussion of our accounting estimates and assumptions that we have identified as critical in the preparation of our condensed consolidated financial statements, refer to our Annual Report on Form 10-K filed with the SEC on March 26, 2015.
Recent Accounting Pronouncements
In April 2015, the Financial Accounting Standards Board (FASB) issued guidance requiring an entity to present debt issuance costs on the balance sheet as a direct deduction from the related debt liability as opposed to an asset. Amortization of the costs will continue to be reported as interest expense. The update is effective for annual reporting periods (including interim reporting periods within those periods) beginning after December 15, 2015. Early adoption is permitted for financial statements that have not been previously issued, and the new guidance would be applied retrospectively to all prior periods presented. The adoption of this standard update is not expected to have a material impact on our consolidated financial statements.
In August 2014, the FASB issued guidance on managements responsibility in evaluating, at each annual and interim reporting period, whether there is substantial doubt about an entitys ability to continue as a going concern and to provide related footnote disclosures. The new guidance is effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter with early adoption permitted.
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In May 2014, the FASB issued a comprehensive revenue recognition standard that will supersede nearly all existing revenue recognition guidance under GAAP. The standard requires revenue to be recognized when promised goods or services are transferred to a customer in an amount that reflects the consideration expected in exchange for those goods or services. The standard permits the use of either the full retrospective or modified retrospective transition method. This guidance is currently effective for annual and interim reporting periods beginning after December 15, 2016, with early adoption not permitted. In April 2015, the FASB voted for a proposed one-year deferral of the effective date of the new revenue recognition standard. If approved, the new standard will become effective for annual and interim periods beginning after December 15, 2017 with early adoption as of the original effective date permitted. We are currently evaluating the impact of this new pronouncement on our financial statements.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
We define market risk as the risk of economic loss as a consequence of the adverse movement of market rates and prices. We believe our principal market risks are commodity price risk and credit risk.
Commodity Price Risk
We sell most of the coal we produce under multi-year coal supply agreements. Historically, we have principally managed the commodity price risks from our coal sales by entering into multi-year coal supply agreements of varying terms and durations, rather than through the use of derivative instruments.
Some of the products used in our mining activities, such as diesel fuel, explosives and steel products for roof support used in our underground mining, are subject to price volatility. Through our suppliers, we utilize forward purchases to manage a portion of our exposure related to diesel fuel volatility. A hypothetical increase of $0.10 per gallon for diesel fuel would have increased net loss by $0.2 million for the three months ended March 31, 2015. A hypothetical increase of 10% in steel prices would have increased net loss by $0.5 million for the three months ended March 31, 2015. A hypothetical increase of 10% in explosives prices would have increased net loss by $0.4 million for the three months ended March 31, 2015.
Credit Risk
Most of our coal sales are made to electric utilities. Therefore, our credit risk is primarily with domestic electric power generators. Our policy is to independently evaluate each customers creditworthiness prior to entering into a transaction with the customer and to constantly monitor outstanding accounts receivable against established credit limits. When deemed appropriate, we will take steps to reduce credit exposure to customers that do not meet our credit standards or whose credit has deteriorated. Credit losses are provided for in the financial statements and have historically been minimal.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Our management, including our Chief Executive Officer and Chief Financial Officer, reviewed and evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2015. Based upon such review and evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the date of such evaluation to provide reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the SECs rules and forms and that such information is accumulated and communicated to the Companys management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
During the first quarter of 2015, there has been no change in the Companys internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Companys internal control over financial reporting.
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We are involved from time to time in various lawsuits and claims arising in the ordinary course of business. Although the outcomes of these lawsuits and claims are uncertain, we do not believe any of them will have a material adverse effect on our business, financial condition or results of operations.
There have been no material changes in our risk factors from those disclosed in our Annual Report on Form 10-K filed with the SEC on March 26, 2015.
Item 4. Mine Safety Disclosures
Information concerning mine safety violations or other regulatory matters required by Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of Regulation S-K is included in Exhibit 95.1 to this Quarterly Report on Form 10-Q.
(a) Submission of Matters to a Vote of Security Holders
The Company held its Annual Meeting of Shareholders on May 12, 2015. The final results for each of the matters submitted to a vote of shareholders at the Annual Meeting of Shareholders are listed below. Broker non-votes are not shown because there is no public trading market for the Companys Common Stock, and no brokers hold shares for any underlying beneficial owners of such shares.
Proposal 1: To elect each of the following to serve as a Class I Director of the Company to serve a three-year term expiring at the 2018 Annual Meeting of Shareholders or until the earlier of his death, resignation, or removal, or until his successor has been duly elected and qualified.
Name |
Votes For |
Votes Against |
Abstentions | |||
Kenneth E. Allen |
21,786,881 | | 66,343 | |||
Anson M. Beard, Jr. |
21,798,881 | | 54,343 | |||
Martin D. Wilson |
21,798,881 | | 54,343 |
Proposal 2: To ratify the previous appointment of J. Hord Armstrong, III and Greg A. Walker as Class II Directors with terms expiring at the 2016 Annual Meeting of Shareholders or until the earlier of their death, resignation, or removal or until their successors have been duly elected and qualified.
Votes For |
Votes Against |
Abstentions | ||
21,798,881 |
| 54,343 |
Proposal 3: To ratify the previous appointment of James C. Crain, Richard F. Ford and Bryan H. Lawrence as Class III Directors with terms expiring at the 2017 Annual Meeting of Shareholders or until the earlier of their death, resignation, or removal or until their successors have been duly elected and qualified.
Votes For |
Votes Against |
Abstentions | ||
21,798,881 |
| 54,343 |
Proposal 4: To ratify and approve all prior acts taken by the Companys Board of Directors, committees of the Board of Directors and officers on behalf of the Company.
Votes For |
Votes Against |
Abstentions | ||
21,560,694 |
| 292,530 |
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Appointment of Chief Executive Officer
On May 12, 2015, the Companys board of directors (the Board) appointed Martin D. Wilson, previously President and Chief Commercial Officer, as President and Chief Executive Officer of the Company, effective immediately. Mr. Wilson succeeds J. Hord Armstrong, III as the Companys Chief Executive Officer. Mr. Armstrong is the current Chairman of the Board and will remain in this position as Executive Chairman of the Board.
Mr. Wilson, age 53, served as the President of our predecessor, Armstrong Land Company, LLC, and as a member of our predecessors board of managers, from its formation in 2006 until 2011. From 2011 to July 2014, Mr. Wilson was our President, and since that time, he served as our President and Chief Commercial Officer. From 1985 to 1988, Mr. Wilson was employed by KPMG Peat Marwick. From 1988 until 2005, he served as President and Chief Operating Officer of D&K Healthcare Resources, Inc.
Effective May 16, 2015, the annual salaries for Messrs. Wilson and Armstrong will be adjusted to $450,000 and $380,000, respectively, such compensation changes being approved by the compensation committee of the Board. The remaining terms of their respective employment agreements, as periodically reviewed and applied by the compensation committee of the Board, will remain unchanged.
(b) There have been no material changes to the procedures by which security holders may recommend nominees to the Companys Board of Directors during the fiscal quarter ended March 31, 2015.
Incorporated by Reference | Filed or Furnished Herewith |
|||||||||||||||||||||
Exhibit |
Description |
Form | File Number | Exhibit | Filing Date |
|||||||||||||||||
4.1 | Fourth Supplemental Indenture, dated as of January 29, 2015, among Armstrong Coal Sales, LLC, Armstrong Energy, Inc., and Wells Fargo Bank, National Association, as Trustee under the Indenture. | 10-K | 333-191182 | 4.12 | 3/26/15 | |||||||||||||||||
4.2 | Joinder No. 3, dated as of January 29, 2015, to the Security Agreement, dated as of December 21, 2012 (as amended, restated, supplemented, or otherwise modified from time to time), by and among Each of the Parties Listed on the Signature Pages thereto and Those Additional Entities that Thereafter Become Parties thereto and Wells Fargo Bank, National Association, as Trustee and as Collateral Agent. | 10-K | 333-191182 | 4.13 | 3/26/15 | |||||||||||||||||
10.1 | Amended and Restated Armstrong Energy, Inc. 2011 Long-Term Incentive Plan. | 10-K | 333-191182 | 10.30 | 3/26/15 | |||||||||||||||||
10.2 | Guarantor Joinder and Assumption Agreement made as of January 29, 2015 by Armstrong Coal Sales, LLC. | 10-K | 333-191182 | 10.42 | 3/26/15 | |||||||||||||||||
31.1 | Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | X | ||||||||||||||||||||
31.2 | Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | X | ||||||||||||||||||||
32.1# | Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | X | ||||||||||||||||||||
32.2# | Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | X | ||||||||||||||||||||
95.1 | Federal Mine Safety and Health Act Information. | X | ||||||||||||||||||||
101.INS | XBRL Instance Document | X | ||||||||||||||||||||
101.SCH | XBRL Taxonomy Extension Scheme Document | X | ||||||||||||||||||||
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | X | ||||||||||||||||||||
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | X |
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Incorporated by Reference | Filed or Furnished Herewith |
|||||||||||||
Exhibit |
Description |
Form | File Number | Exhibit | Filing Date |
|||||||||
101.LAB | XBRL Taxonomy Extension Label Linkbase Document | X | ||||||||||||
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | X |
# | This certification is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the Exchange Act), or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act. |
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
ARMSTRONG ENERGY, INC. | ||||
Date: May 14, 2015 |
By: | /s/ J. Richard Gist | ||
| ||||
J. Richard Gist | ||||
Senior Vice President and Chief Financial Officer | ||||
(On behalf of the registrant and as Principal Financial Officer) |
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