Warrior Met Coal, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Unaudited results; comparisons are with the corresponding 2021 periods. Amounts below are in millions of dollars unless otherwise noted.
Business context and reporting period
Warrior is an Alabama-based producer and exporter of premium metallurgical coal used in steelmaking. It operates Mine No. 4 and Mine No. 7 and reports one mining segment. The UMWA strike, which began after the collective bargaining agreement expired in April 2021, continued during the quarter. Mine No. 4 restarted in Q1 2022; the company said it maintained customer shipments through business-continuity plans.
Financial and operating highlights
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Sales revenue | $623.3 | $224.8 | $1,005.7 | $431.7 |
| Total revenue | $625.2 | $227.4 | $1,003.8 | $441.2 |
| Operating income (loss) | $372.5 | $(2.8) | $559.4 | $8.2 |
| Net income (loss) | $297.0 | $(4.7) | $443.2 | $(26.0) |
| Diluted EPS | $5.74 | $(0.09) | $8.58 | $(0.51) |
| Segment Adjusted EBITDA | $432.2 | $72.0 | $679.3 | $124.6 |
Q2 operating margin was 59.6% and net margin was 47.5%, versus an operating loss and net loss in Q2 2021. For the first half, operating margin was 55.7% and net margin was 44.2%. These margin calculations use reported total revenue.
- Pricing and volumes: Average met coal selling price rose to $445.21 per metric ton in Q2 from $135.97; first-half price was $415.21 versus $126.09. Sold volume fell to 1.400 million metric tons in Q2 from 1.653 million, and to 2.422 million in the first half from 3.424 million. The filing attributes lower shipments to port maintenance, limited railcars and port congestion.
- Production and costs: Q2 production was 1.512 million metric tons versus 1.084 million; first-half production was 2.907 million versus 3.054 million. Cash cost of sales per ton rose to $135.60 in Q2 from $91.82 and to $133.85 for the first half from $89.16. The company cited higher transportation and royalty costs and inflation.
- Cash flow: First-half operating cash flow was $399.7, versus $113.9 in 2021. Investing cash outflow was $100.8, including $78.7 of capital expenditures and $21.1 of deferred mine development costs. Financing cash outflow was $49.9, including $32.1 of dividends paid and $14.1 of finance-lease principal repayments. Cash increased $249.0 to $644.8.
- Liquidity and debt: At June 30, cash was $644.8 and ABL availability was $123.3, for reported total liquidity of $768.1. No ABL loans were outstanding; $8.7 of letters of credit were issued. Senior secured notes had $350.0 principal outstanding, a 7.875% fixed rate and a December 2028 maturity; carrying value was $340.4. The company reported compliance with applicable ABL covenants.
- Balance sheet: Current assets were $1,113.6 and current liabilities were $144.5. Total liabilities were $607.9 and stockholders’ equity was $1,291.1. Trade receivables rose to $295.0 from $122.2 and inventories to $140.4 from $59.6, reflecting higher prices, timing and shipment delays.
- Shareholder returns: The regular quarterly dividend increased from $0.05 to $0.06 per share. A $0.50-per-share special dividend was paid in May. On August 1, the board declared a further $0.06 regular dividend and $0.80 special dividend, payable after quarter-end.
Material changes versus the prior comparable period
Results improved sharply as higher met coal prices more than offset reduced sales volumes and higher unit costs. The first half shifted from a $26.0 net loss to $443.2 net income. Cash generated from operations increased, but investing outflows also rose substantially, reflecting higher capital spending and mine development. Strike-related idle mine costs declined year over year, while business interruption expenses increased to $13.0 for the first half from $7.0.
Other revenue was $(1.9) for the first half versus $9.5 in 2021, principally reflecting larger losses on natural-gas swap fair-value changes. The company recognized $27.7 of swap losses in the first half; all outstanding swaps were settled in Q2, leaving none at June 30. Reported income tax expense was $101.8 for the first half, while management said federal NOL utilization principally offset cash taxes.
Outlook, management commentary and risks
- Blue Creek: The company relaunched development of the project in May. It expects to invest approximately $650–$700 over five years, including about $45 in 2022. Current plans call for initial continuous-miner development tons in Q3 2024 and longwall startup in Q2 2026. Expected longwall production is 4.4 million metric tons annually over the first ten years. These are company expectations, not guaranteed outcomes; management noted inflation has increased project capital requirements.
- 2022 capital spending: Guidance was approximately $75–$80 for sustaining capital and $110–$120 for discretionary capital, including Blue Creek, portal construction and longwall equipment. The company said spending would be reassessed based on mining plans, coal prices and available funding.
- Market and operating risks: Management cited weakening steel demand, coal-price volatility, inflation, supply-chain constraints, transportation availability and the continuing UMWA strike. The company warned that strike-related disruption could affect production and shipments and that operating plans may vary by quarter.
- Other exposures: The company was reviewing a Department of Labor request to increase collateral for legacy black-lung liabilities to $28.0 from $17.0. It reported $41.8 of reclamation surety bonds, $18.6 of black-lung collateral and $3.6 for miscellaneous purposes. No environmental accruals other than mine reclamation obligations, and no accruals for miscellaneous litigation, were reported.
- Near-term funding view: Management stated that operating cash flows and cash on hand were expected to fund debt service and planned operating and capital needs for at least the next 12 months, while noting uncertainty around labor negotiations and COVID-19 effects. The filing did not provide a clear full-year earnings or revenue forecast.
Important facts for investors to verify
- Whether UMWA negotiations resolve and how the strike affects mine output, labor costs and shipments.
- Whether railcar availability, port congestion and maintenance constraints ease, and whether inventory converts to sales and cash.
- Whether met coal prices and global steel demand remain sufficient to support margins amid inflation and rising unit costs.
- Blue Creek’s updated total cost, financing plan, schedule and ability to meet projected production and return expectations.
- Potential changes in black-lung collateral requirements, cash taxes and the company’s capacity to sustain dividends and planned capital spending.