Warrior Met Coal, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022; filed November 2, 2022. Warrior produces and exports metallurgical coal for steelmaking from underground mines in Alabama. Results are unaudited.
Financial results and liquidity
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Total revenue | $390.2 million | $202.5 million | $1,394.0 million | $643.7 million |
| Operating income | $124.4 million | $51.2 million | $683.8 million | $59.5 million |
| Net income | $98.4 million | $38.4 million | $541.6 million | $12.4 million |
| Diluted earnings per share | $1.90 | $0.74 | $10.48 | $0.24 |
| Operating margin | 31.9% | 25.3% | 49.1% | 9.2% |
| Net margin | 25.2% | 19.0% | 38.9% | 1.9% |
- Drivers and costs: Q3 coal sales were $371.9 million, up $172.2 million year over year, reflecting a $65.64/metric ton rise in average net selling price to $273.49 and higher sales volume of 1.36 million metric tons versus 0.96 million. Nine-month average price rose to $364.27 from $144.01 per metric ton, while sales volume fell to 3.78 million from 4.39 million tons. Cash cost of sales per ton increased to $148.56 in Q3 and $139.15 for the nine months, from $94.68 and $90.37, respectively.
- Cash flow: Nine-month operating cash flow was $646.9 million, versus $176.8 million. Investing used $156.7 million, including $120.0 million of property, plant and equipment purchases and $35.7 million of deferred mine development costs. Financing used $140.4 million, including $76.5 million of dividends, $37.8 million of note retirements and $22.4 million of finance-lease repayments. Cash increased $349.8 million to $745.7 million.
- Balance sheet and liquidity: At September 30, cash was $745.7 million; total liquidity was $869.0 million, including $123.3 million available under the ABL facility. No ABL loans were drawn; $8.7 million of letters of credit were outstanding. Long-term debt carrying value was $303.9 million, representing $312.2 million principal of 7.875% senior secured notes due 2028, net of discount. Total liabilities were $587.7 million and stockholders’ equity was $1,347.6 million.
- Capital returns: The company paid $76.5 million in dividends during the first nine months, including special dividends of $0.50 and $0.80 per share. The regular quarterly dividend was raised from $0.05 to $0.06 per share. Approximately $59.4 million remained under the $70 million stock repurchase authorization.
Material changes and management commentary
- Profitability increased substantially year over year, primarily due to higher met coal prices. Q3 production was 1.49 million tons versus 1.02 million; nine-month production was 4.40 million versus 4.08 million.
- Shipment delays from railcar availability, port maintenance and congestion constrained sales, particularly in the nine-month period. Higher transportation and royalty costs, along with inflation, contributed to increased cash costs; management attributed approximately $16.3 million of nine-month cost increases to inflation.
- The UMWA strike continued after the collective bargaining agreement expired in April 2021. Mine No. 4 restarted in Q1 2022, while Mine No. 4 and Mine No. 7 continued to operate at reduced levels. Nine-month strike-related business interruption and idle mine expenses were $20.1 million and $10.1 million, respectively.
- Management relaunched development of the Blue Creek mine. Expected investment is $650–$700 million over five years, including approximately $45 million budgeted for 2022. The company expects first development tons in Q3 2024 and longwall start-up in Q2 2026; planned average output is 4.4 million metric tons annually over the first ten years. Management reported higher project costs from inflation but said design changes could increase production by about 10% and advance longwall production by approximately 15 months.
- 2022 capital expenditure guidance was $75–$80 million for sustaining capital and $110–$120 million for discretionary spending, including Blue Creek, 4 North portal construction and longwall equipment. The filing reports $120.0 million of capital expenditures and $35.7 million of deferred mine development costs for the first nine months.
Outlook, risks and unusual items
- Management said cash flows and available liquidity should fund debt service, operating needs and planned capital expenditures for at least the next twelve months, while emphasizing uncertainty from the strike, global economic weakness, inflation, COVID-related supply disruptions and sanctions affecting coal trade.
- Met coal prices were volatile: the Queensland premium low-volatility index fell from about $302/ton at the start of Q3 to $188 on August 2, then ended the quarter at $270.50. Prices and demand remain exposed to global steel activity, geopolitical developments, including the Russia-Ukraine war, and changes in trade flows.
- Natural gas hedge contracts were settled by Q2; none were outstanding at September 30. The company recorded a $27.7 million nine-month mark-to-market loss on gas hedges, included in other revenues. Nine-month income tax expense was $122.1 million, including $122.2 million of deferred tax expense; management said federal NOLs principally offset cash taxes.
- The Department of Labor requested an increase in collateral for legacy Walter Energy black-lung liabilities to $28.0 million; Warrior appealed. The company reported $17.0 million of surety bonds and $8.5 million of short-term investments collateralizing them, as well as $36.9 million of estimated net black-lung liabilities.
- The company repurchased and extinguished $37.8 million principal amount of notes during Q3, recording a $0.5 million loss on early extinguishment. Management estimated discounts and interest savings of approximately $19.0 million through maturity.
- The filing reported no environmental accruals other than asset retirement obligations and no accruals for miscellaneous litigation. Management stated disclosure controls were effective and there were no material changes in internal control over financial reporting during the quarter.
Key facts for investors to verify
- Whether the UMWA negotiations resolve and how the strike affects operating capacity, costs and shipments.
- Whether rail and port constraints ease and whether inventory and receivables convert to cash as expected.
- Met coal pricing, steel demand and the impact of geopolitical and trade disruptions on realized prices and costs.
- Blue Creek’s updated cost, funding plan, construction milestones and expected production start dates.
- The effect of inflation on operating costs and capital spending, alongside the sustainability of special dividends and other capital returns.
- The outcome of the black-lung collateral appeal and the company’s continuing liquidity and debt covenant position.