Warrior Met Coal, Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023; filed November 1, 2023. Warrior produces and exports premium metallurgical coal from underground mines in Alabama, with natural gas and royalty revenues as ancillary businesses. Financial amounts below are in U.S. dollars; “M” means millions.
Financial performance and condition
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Total revenue | $423.5M | $390.2M | $1,312.8M | $1,394.0M |
| Operating income | $107.8M | $124.4M | $407.9M | $683.8M |
| Net income | $85.4M | $98.4M | $349.8M | $541.6M |
| Diluted EPS | $1.64 | $1.90 | $6.72 | $10.48 |
| Operating margin | 25.4% | 31.9% | 31.1% | 49.1% |
| Net margin | 20.2% | 25.2% | 26.6% | 38.9% |
- Sales and pricing: Q3 coal sales were $416.9M, up from $371.9M, as tons sold rose 51% to 2.048M; average net selling price fell 26% to $203.56 per metric ton. For the nine months, sales fell 6.5% to $1,288.4M: 44% higher sales volume was more than offset by a lower average price of $237.32 per ton versus $364.27.
- Costs: Cash cost of sales per ton improved to $126.36 from $148.56 in Q3 and to $132.49 from $139.15 year to date. However, reported cost of sales rose with higher volumes and production costs, including labor. Lower coal prices also reduced transportation and royalty costs.
- Cash flow: Nine-month operating cash flow was $456.0M, versus $646.9M. Investing used $344.8M, including $310.8M of property, plant and equipment purchases; financing used $253.9M. Cash declined $142.7M from year-end 2022 to $686.8M.
- Liquidity and debt: Total liquidity was $810.1M: $686.8M cash plus $123.3M available under the ABL Facility, with no ABL loans outstanding and $8.7M of letters of credit. Long-term debt carrying value was $152.9M at quarter-end versus $302.6M at December 31, 2022; the notes bear 7.875% interest and mature in December 2028. Finance lease liabilities were $23.5M.
- Investment and shareholder returns: Blue Creek development capital expenditures were $191.3M year to date. The company paid $57.4M in dividends, including a $0.88-per-share special dividend; the regular quarterly dividend was $0.07 per share. The board declared another $0.07 quarterly dividend after quarter-end.
Material changes versus the prior comparable period
- Q3 revenue increased 8.5%, but operating income declined 13.4% and net income declined 13.2%, principally reflecting lower coal prices and higher costs associated with greater production and sales volumes.
- For the first nine months, revenue declined 5.8%, operating income 40.4%, and net income 35.4%. Higher sales volumes did not offset the sharp decline in average selling prices and increased costs.
- Production and shipments improved as employees returned following the strike and rail and Port of Mobile performance improved. Q3 production increased 21% to 1.808M metric tons; excess inventory was reduced.
- The company retired approximately $146.1M principal amount of notes through Q3 offers and recorded an $11.7M early-extinguishment loss. It also repurchased approximately $8.0M principal amount in the open market during the first nine months.
Outlook, management commentary and risks
- Blue Creek: Full-year 2023 capital spending guidance was $420M–$485M, including sustaining expenditures of $95M–$105M. Blue Creek development spending was estimated at $250M–$300M for 2023, with 2024 expected to be a similar amount, subject to change. Transportation and logistics scope changes are expected to add $120M–$130M to project capital costs over the remaining development period. First continuous-miner development tons were expected in Q3 2024, and longwall startup in Q2 2026.
- Costs and markets: Management cited persistent mining-industry inflation in labor, freight, materials and equipment. It reported that global seaborne met coal markets strengthened in Q3, while steel demand and the global economy remained uncertain. Coal prices, steel demand, logistics performance, weather and geopolitical events may affect results.
- Labor: The union ended the strike in February 2023 and eligible employees’ return-to-work process was completed, but negotiations for a new collective bargaining agreement continued. Management expected ongoing related legal expenses.
- Cyber incident: A ransomware attack discovered July 29, 2023 affected on-premises IT systems and involved theft of certain company data. Warrior reported restoring access to all material data, no significant operating disruption or material financial impact, and no expectation of material future incident-related costs; it self-insures cyber risks.
- Other exposures: The company highlighted reclamation and black-lung obligations, including an unresolved appeal concerning required black-lung collateral and proposed regulatory changes. It had $44.0M of reclamation surety bonds, $18.6M of black-lung collateral surety bonds and $5.2M for miscellaneous purposes. It reported no environmental accruals other than asset retirement obligations and no accrued miscellaneous litigation losses.
- Management stated that cash, operating cash flows and ABL availability should fund debt service, operating needs and planned capital expenditures, including Blue Creek, for at least the next 12 months and beyond. This outlook depends on operating cash generation, market conditions, inflation and labor negotiations; future special dividends or repurchases are discretionary.
Important facts for investors to verify
- Whether met coal pricing and sales volumes sustain margins as production and shipment capacity changes.
- Blue Creek’s revised total cost, inflation exposure, funding plan and construction milestones, including the stated $120M–$130M scope-related increase.
- Progress and potential operating or cost implications of the unresolved collective bargaining negotiations.
- Cash generation, working-capital movements, capital spending and remaining debt following the note repurchases.
- Black-lung collateral requirements and any developments related to the DOL appeal or proposed rules.
- Any subsequent cyber developments, customer or transport disruptions, or changes in dividend and repurchase decisions.