Warrior Met Coal, Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021; unaudited. Warrior produces and exports metallurgical coal for steelmaking from its Alabama mines, with ancillary natural gas and royalty revenues.
Financial and operating performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $202.5m | $180.1m | $643.7m | $570.5m |
| Operating income (loss) | $51.2m | ($14.5m) | $59.5m | $10.6m |
| Net income (loss) | $38.4m | ($14.4m) | $12.4m | ($2.1m) |
| Adjusted EBITDA | $104.9m | $16.8m | $216.8m | $99.1m |
| Coal sold / produced | 0.961m / 1.024m metric tons | 1.753m / 1.712m metric tons | 4.385m / 4.079m metric tons | 4.734m / 5.536m metric tons |
| Average selling price per ton | $207.85 | $99.96 | $144.01 | $117.37 |
| Cash cost of sales per ton | $94.68 | $85.92 | $90.37 | $91.09 |
Q3 operating margin was 25.3%, versus negative 8.1% a year earlier; nine-month operating margin was 9.2%, versus 1.9%. Higher realized coal prices more than offset lower sales volumes. Q3 sales revenue rose $24.5m, while nine-month sales revenue increased $75.9m. Adjusted EBITDA is a non-GAAP measure.
Cash flow and liquidity: Nine-month operating cash flow was $176.8m, compared with $82.2m; investing cash outflow was $47.4m, compared with $79.1m; financing cash outflow was $72.9m, versus $20.0m of inflow. Cash increased $56.5m to $268.4m. Capital expenditures were $34.1m and deferred mine development costs were $13.5m.
Balance sheet at September 30: Total assets were $1.345bn and current assets $479.2m; current liabilities were $134.4m. Long-term debt was $340.5m, including $343.4m principal of 8% secured notes due 2024, net of discount. No ABL loans were outstanding; $87.3m was available after $9.4m of letters of credit. Total reported liquidity was $355.7m. Finance lease liabilities were $57.2m. The company reported compliance with applicable ABL covenants.
Material changes and significant items
- The UMWA contract expired April 1, 2021, and the union strike continued. Mine No. 4 was idled and Mine No. 7 operated at reduced levels. Nine-month results included $20.2m of idle-mine expense and $13.9m of strike-related business-interruption expense.
- For Q3, sales volume fell 45% year over year, while the average selling price more than doubled. Gross price realization was 81% of the Platts index, versus 90% a year earlier; for nine months it was 94%, versus 92%.
- Nine-month income tax expense was $22.4m, driven in part by a $47.8m non-cash valuation allowance against Alabama deferred tax assets, partly offset by a $22.9m non-cash tax benefit from remeasurement following a state tax-law change.
- Natural-gas swaps generated an $8.7m mark-to-market loss for nine months, including $5.8m in Q3. A $1.4m lawsuit settlement was recorded as Q3 other income.
- XCoal accounted for 61.1% of Q3 sales and 58.5% of nine-month sales; management attributed higher Asian sales partly to opportunities with Chinese customers amid China’s ban on Australian coal.
Outlook, risks, and contingencies
- Management provided no full-year 2021 guidance, citing uncertainty from the strike, COVID-19 and China’s Australian-coal ban. It said anticipated 2021 customer commitments were approximately 4.4–5.0m metric tons.
- Management estimated a 5.0–6.0m metric-ton production and sales range over a twelve-month period without a new labor agreement; with a new agreement, it expected a ramp toward an approximately 6.8m-ton annual run rate within three to four months. These are conditional expectations, not full-year guidance.
- The planned $25m first-year Blue Creek development budget was largely delayed to preserve cash and liquidity. Management described the project as a potential growth investment; development timing and returns remain uncertain.
- The quarterly dividend remained $0.05 per share; the board declared another $0.05 dividend for payment in November 2021. The stock repurchase program was temporarily suspended. Management said future dividends could be suspended if deemed necessary.
- Key risks include labor disruption, coal-price and steel-demand volatility, dependence on transportation and customer markets, operating and safety risks, environmental and reclamation obligations, and access to capital. The company reported $40.9m of reclamation surety bonds, $17.0m of black-lung collateral, and $3.6m of other surety bonds and letters of credit. It reported no accruals for environmental matters beyond asset-retirement obligations and no accrued miscellaneous litigation at quarter-end.
Important facts for investors to verify
- Progress and potential production, shipping, and cost effects of UMWA negotiations and the strike.
- Coal price realization, sales volumes, and customer concentration, particularly XCoal and sales into China.
- Cash generation, available ABL borrowing capacity, debt and lease obligations, and any change in covenant status.
- Timing and funding requirements for Blue Creek, and whether management resumes share repurchases or changes the dividend.
- Tax consequences of the Alabama deferred-tax valuation allowance and the future financial effects of gas hedges.