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Armstrong says it likely cannot meet debt obligations, posts Q2'17 net loss


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Armstrong says it likely cannot meet debt obligations, posts Q2'17 net loss

With an Aug. 14 deadline looming to make an interest payment, Armstrong Energy Inc. released its second-quarter earnings with warnings to investors that it is likely to default on other debt and faces a real threat of bankruptcy.

"Our continuing operating losses, negative cash flow projections, indenture default and other liquidity risks raise substantial doubt about whether we will meet our obligations as they become due over the next year," the coal producer said in an Aug. 11 press release. Executives expressed similar sentiments in the previous two quarters.

Armstrong reported a net loss of about $17.2 million for the second quarter, compared to a $15 million net loss in the same period last year and a $15.4 million net loss in the first quarter, with adjusted EBITDA of about $5 million and revenue of $60.9 million. In the second quarter of last year, Armstrong reported an adjusted EBITDA of roughly $7.1 million and a revenue of $60.3 million.

The company attributed the increased loss to a decline in gross margin year over year, as well as higher interest expenses and costs associated with evaluating strategic alternatives in 2017. The losses were partially offset by a gain on disposal of fixed assets of $700,000.

Armstrong said its current liquidity is $43.3 million, composed solely of cash on hand. "We have experienced recurring losses from operations, which has led to a substantial decline in cash flows from operating activities. Our current operating plan indicates that we will continue to incur losses from operations and generate negative cash flows from operating activities," the release said.

The company's financial position worsened on June 15, when it defaulted on the terms of the indenture governing its 11.75% senior secured notes due 2019 after failing to make the $11.75 million interest payment due on the notes.

S&P Global Ratings lowered its corporate credit and issue-level ratings on the coal producer to CC from CCC- as a result. Moody's also downgraded Armstrong, to Ca from Caa1, and described the company's outlook as negative.

In an effort to negotiate a restructuring of its debt, Armstrong and some of its subsidiaries entered a forbearance agreement with the holders of about $158 million in aggregate principal amount of its senior secured notes due 2019. As part of this agreement, the holders have agreed to forbear from exercising their rights and remedies under the indenture until the earlier of Aug. 14 or an event of termination.

"We also have other debt obligations entered into to finance the acquisition of certain equipment and land. Certain of these financing agreements include cross-default or cross-event of default provisions. As a result of our default under the indenture, the lenders that are party to certain of these agreements could elect to declare some or all of the amounts outstanding as immediately due and payable," the release said.

Armstrong's average sales price per ton in the second quarter was $40.67, and the average cost of coal sales per ton was $34.51.

General and administrative expenses were $3.2 million for the second quarter, an 8.8% increase from the same period last year. Armstrong also recognized non-cash impairment charges of $3.4 million in the second quarters of this year and last year. This year's cost is due to the write-off of mine development costs associated with the cancellation of a mineral reserve lease in Union and Webster counties, Ky.

In June, Armstrong offered retention bonus agreements to executives and other key employees.

S&P Global Ratings and S&P Global Market Intelligence are owned by S&P Global Inc.