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| WLT > SEC Filings for WLT > Form 10-Q on 6-Nov-2009 | All Recent SEC Filings |
6-Nov-2009
Quarterly Report
This discussion should be read in conjunction with the condensed consolidated financial statements and notes thereto of Walter Energy, Inc. and its subsidiaries, particularly Note 9 of "Notes to Condensed Consolidated Financial Statements," which provides our net sales and revenues and operating income by reportable segment.
DISCONTINUED OPERATIONS
As more fully discussed in Note 2 of "Notes to Consolidated Financial Statements," we announced the permanent closure of the underground coal mine owned by the Kodiak Mining Company, LLC ("Kodiak") in December 2008, which is majority owned by Walter Minerals (formerly United Land Corporation), due to high operational costs, difficult operating conditions and a challenging pricing environment for Kodiak's product. In December 2008, we also made the decision to close our Homebuilding business ("Homebuilding"). Additionally, on April 17, 2009, we completed the spin-off of our Financing segment, which subsequently merged with Hanover Capital Mortgage Holdings, Inc. and became Walter Investment Management Corp. As such, the operating results, assets and liabilities, and cash flows of Kodiak, Homebuilding and Financing have been reported apart from our continuing operations as "discontinued operations" for all periods presented.
RESULTS OF CONTINUING OPERATIONS
Summary Operating Results of Continuing Operations for the
Three Months Ended September 30, 2009 and 2008
For the three months ended September 30, 2009
Underground Surface Walter Cons
(in thousands) Mining Mining Coke Other Elims Total
Net sales $ 232,563 $ 24,665 $ 23,269 $ 35 $ (4,201 ) $ 276,331
Miscellaneous income 497 564 38 875 - 1,974
Net sales and revenues 233,060 25,229 23,307 910 (4,201 ) 278,305
Cost of sales (exclusive
of depreciation) 159,717 14,803 20,404 1 (4,247 ) 190,678
Depreciation 14,824 2,142 1,140 108 - 18,214
Selling, general &
administrative 6,349 1,337 2,118 9,468 (34 ) 19,238
Postretirement benefits 8,050 58 (132 ) (264 ) - 7,712
Amortization of
intangibles - 112 - - - 112
Operating income
(loss) $ 44,120 $ 6,777 $ (223 ) $ (8,403 ) $ 80 $ 42,351
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For the three months ended September 30, 2008
Underground Surface Walter Cons
(in thousands) Mining Mining Coke Other Elims Total
Net sales $ 251,479 $ 18,341 $ 53,589 $ 1,521 $ (17,523 ) $ 307,407
Miscellaneous income (106 ) 567 149 389 401 1,400
Net sales and
revenues 251,373 18,908 53,738 1,910 (17,122 ) 308,807
Cost of sales (exclusive
of depreciation) 131,693 14,747 35,586 98 (17,323 ) 164,801
Depreciation 10,463 1,777 1,048 237 - 13,525
Selling, general &
administrative 5,613 652 2,627 4,918 226 14,036
Postretirement benefits 7,285 (5 ) (161 ) (261 ) 1 6,859
Amortization of
intangibles - 67 - - - 67
Operating income
(loss) $ 96,319 $ 1,670 $ 14,638 $ (3,082 ) $ (26 ) $ 109,519
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Dollar Variance for the three months ended September 30, 2009 versus 2008
Underground Surface Walter Cons
(in thousands) Mining Mining Coke Other Elims Total
Net sales $ (18,916 ) $ 6,324 $ (30,320 ) $ (1,486 ) $ 13,322 $ (31,076 )
Miscellaneous
income 603 (3 ) (111 ) 486 (401 ) 574
Net sales and
revenues (18,313 ) 6,321 (30,431 ) (1,000 ) 12,921 (30,502 )
Cost of sales
(exclusive of
depreciation) 28,024 56 (15,182 ) (97 ) 13,076 25,877
Depreciation 4,361 365 92 (129 ) - 4,689
Selling,
general &
administrative 736 685 (509 ) 4,550 (260 ) 5,202
Postretirement
benefits 765 63 29 (3 ) (1 ) 853
Amortization of
intangibles - 45 - - - 45
Operating
income (loss) $ (52,199 ) $ 5,107 $ (14,861 ) $ (5,321 ) $ 106 $ (67,168 )
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Overview
Our income from continuing operations for the three months ended September 30, 2009 was $24.4 million, or $0.45 per diluted share, which compares to $71.3 million, or $1.26 per diluted share, for the three months ended September 30, 2008. In the three months ended September 30, 2009, net sales and revenues decreased $30.5 million and operating income decreased $67.2 million versus the same period in 2008. These decreases were primarily due to lower sales volumes and sales prices of metallurgical coke in the Walter Coke segment in addition to lower average sales prices of hard coking coal and natural gas within the Underground Mining segment.
Outlook and Strategic Initiatives
After completing our transformation from a diversified corporation to a pure play natural resources and energy company by closing our Homebuilding segment and spinning off our Financing segment, we changed our name to Walter Energy, Inc. ("Walter"). Beginning with the first quarter of 2009, the reporting segments were revised to separate the Natural Resources segment into Underground Mining and Surface Mining. Underground Mining includes our underground hard coking coal operations from the No. 4 and No. 7 mines and the natural gas operations. Surface Mining includes the surface coal mining operations of Tuscaloosa Resources, Inc. ("TRI") and Taft Coal Sales & Associates, Inc. ("Taft") as well as the results of Walter Minerals.
º •
º Approximately 1.9 million tons of hard coking coal were sold in the
third quarter of 2009 at an average price of $121.66 per short ton.
The third quarter was a record period for coking coal sales volumes as
sales volumes improved each month in the period, ending with 740,000
tons sold in the month of September. Although worldwide demand for
metallurgical coal is down, Chinese demand for metallurgical coal has
increased significantly and has largely brought worldwide supply and
demand into equilibrium. While we expect our customer focus to remain
in South America and Europe, we are seeing opportunities in the spot
market for sales outside of our traditional customer base, with prices
above the $129.00 per metric ton Australian benchmark. For example, we
had one spot shipment during the quarter, a vessel delivered to a
customer in Asia at a price in excess of the Australian benchmark.
Seaborne metallurgical coal market demand conditions are largely
dependent on continued demand from China for metallurgical coal.
º •
º The third quarter 2009 hard coking coal average price per short ton of
$121.66 included 79,000 short tons (or approximately 72,000 metric
tons) of our 2008/2009 contracted $315.00 per metric ton carryover
pricing. Prior to the third quarter, we had approximately 1.5 million
metric tons of 2008/2009 contracted $315 per metric ton coal remaining
to ship. We have now resolved 640,000 metric tons of the outstanding
carryover volumes, with delivery of approximately 115,000 metric tons
expected in the fourth quarter 2009 and delivery of 453,000 metric
tons expected in 2010. In addition to the 453,000 metric tons priced
at $315.00 per metric ton expected in 2010, we expect to deliver
approximately 2.2 million metric tons in 2010 at average contract
prices of $129.00 per metric ton. The remaining 2010 expected sales
volume is unpriced.
º •
º Our sales volume expectation for the fourth quarter of 2009 ranges
from 1.6 million to 1.7 million tons and our forecasted fourth quarter
operating income per ton ranges from $27.00 to $33.00. Fourth quarter
ranges reflect a strengthening in demand and contract pricing
opportunities. Results could improve significantly if we are able to
resolve discussions with our customers regarding approximately 860,000
tons remaining at the $315.00 per metric ton carryover pricing.
º •
º We ended the quarter with 470,000 tons in inventory, which is in line
with our normal operating level. However, we expect inventories to
decline further in the fourth quarter of 2009 as we expect to sell
more coal than we produce.
º •
º Coking coal production totaled 1.5 million tons in the third quarter
of 2009, up approximately 23% from the third quarter of 2008. With
strengthening demand during the third quarter of 2009, we increased
production over the prior quarter. Production costs averaged $60.60
per ton for the quarter ended September 30, 2009 as compared to $68.99
for the third quarter of 2008 as a result of increased production
volume, offset in part, by higher labor and depreciation costs.
Production costs are expected to increase to approximately $65.00 to
$70.00 per ton in the fourth quarter of 2009 due to decreased volumes
and a higher ratio of continuous miner tons to longwall tons due to
anticipated longwall moves.
º •
º Although production costs are expected to increase in the fourth
quarter of 2009, operating margins will be positively impacted by a
higher average selling price anticipated for the fourth quarter of
2009, as compared to the third quarter of 2009.
º •
º We recently finalized our long-range mining plan and expect to produce
approximately 8.0 million tons of premium hard coking coal in 2010,
highlighted by incremental production from our Mine No. 7 East
expansion. We also expect to increase coking coal production to
between 8.5 and 9.0 million tons in 2011 and between 9.0 and
9.5 million tons in 2012.
º •
º The natural gas business sold 1.5 billion cubic feet of natural gas at
an average price of $3.29 per thousand cubic feet in the third quarter
of 2009 versus 1.7 billion cubic feet at $8.69 per thousand cubic feet
in the third quarter of 2008. Pricing forecasts for 2010 have recently
strengthened. In October 2009, we hedged the sale of approximately 24%
of our full year 2010 production, or 1.5 bcf, at $6.20 per thousand
cubic feet.
º •
º We will continue to evaluate expansion opportunities, potential
acquisitions and further investments in coal and natural gas.
º •
º During the third quarter of 2009, the surface mining operations
produced 359,000 tons of steam and industrial coal and sold 302,000
tons at an average operating income of $17.38 per ton. The average
selling price improved $17.66 per ton versus the third quarter of 2008
primarily on new contracts that began in January 2009.
º •
º In the fourth quarter of 2009, we expect to sell between 300,000 and
330,000 tons at an average operating income of between $12.00 to
$17.00 per ton, as approximately 90 percent of expected 2009
production has been profitably priced with fixed-price contracts.
º •
º Walter Coke returned to near-profitability in the third quarter of
2009 recording an operating loss of $0.2 million. The results were
driven by improvements in customer demand for metallurgical coke
within the domestic steel industry.
º •
º Walter Coke sold 38,478 tons of metallurgical coke at an average price
of $361.95 per ton in the third quarter of 2009. In the prior year
period, we sold 101,077 tons at $397.20 per ton. The decline in
average selling price and sales volume reflect lower domestic steel
capacity utilization versus the prior year period.
º •
º Walter Coke is expected to return to profitability in the fourth
quarter of 2009 as a result of increased production to 80 coking ovens
per day, supported by increased orders late in the third quarter of
2009. In the fourth quarter of 2009, metallurgical coke sales are
expected to range between 78,000 to 86,000 tons at an average
operating income per ton of between $19.00 and $24.00.
Summary of Third Quarter Consolidated Results of Continuing Operations
Net sales and revenues for the three months ended September 30, 2009 decreased $30.5 million, or 9.9% from the same period in 2008. This decline in revenues resulted from decreased revenues in the Walter Coke and Underground Mining segments. The revenue decrease in the Walter Coke segment is due to lower volumes and average sales price of metallurgical coke. The decrease in the Underground Mining segment is principally due to lower natural gas revenues driven by lower volumes and pricing and decreased revenues from the sale of hard coking coal. These reductions in revenue were somewhat offset by an increase in revenue in the Surface Mining segment primarily due to an improvement in the average selling price of coal and the inclusion of a full quarter of Taft's sales in the third quarter of 2009 compared to only one month in 2008.
Depreciation for the three months ended September 30, 2009 increased $4.7 million, compared to the same period in 2008. The increase was primarily due to investments in the expansion of mining operations, mostly during the last half of 2008, as well as replacement of certain mining equipment.
Selling, general & administrative expense increased $5.2 million for the quarter ended September 30, 2009 compared to the same period in 2008 and is mostly attributable to accrued expenses associated with the planned relocation of our corporate headquarters and a prior year expense credit related to a non-cash equity compensation plan which did not occur again in 2009.
The effective tax rates for the three months ended September 30, 2009 and 2008 were 35.4% and 31.6%, respectively, and reflect the impact of changes in the estimates for the full-year tax rate as compared to the estimates made as of June 30, 2009 and 2008, respectively.
The current and prior year period results also include the impact of the factors discussed in the following segment analysis.
Segment Analysis
Underground Mining
Underground Mining, which includes the operations of Jim Walter Resources
and Blue Creek Coal Sales, reported revenues of $233.1 million in the third
quarter of 2009, a decrease of $18.3 million compared to the same period in
2008. The decrease in revenues was primarily due to a 23.9% and 62.1% decrease
in the average selling price of coal and natural gas, respectively, partially
offset by a 27.9% increase in sales volumes, as compared to the same period in
2008 as shown in the table below:
Three months ended
September 30,
2009 2008
Average coal selling price(1) (per short ton) $ 121.66 $ 159.89
Tons of coal sold(1) (in thousands) 1,871 1,463
Average hedged natural gas selling price (per mcf) $ 3.29 $ 8.69
Billion cubic feet of natural gas sold 1.5 1.7
Number of natural gas wells 413 421
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º (1)
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Underground Mining's $52.2 million decrease in operating income in the third quarter of 2009, compared to the same period in 2008 was primarily the result of the reductions in revenues as described above, an increase in cost of sales (exclusive of depreciation) mostly due to volume increases in tons of coal sold and an increase in depreciation expenses as a result of continued investment in the No. 7 East mine expansion project and the replacement of certain mining equipment.
Surface Mining, which includes the operations of TRI, Taft and Walter Minerals, reported a revenue increase of $6.3 million in the third quarter of 2009 compared to the same period last year.
Three months ended
September 30,
2009 2008
Average coal selling price(1) (per short ton) $ 78.90 $ 61.24
Tons of coal sold(1) (in thousands) 302 283
--------------------------------------------------------------------------------
º (1)
º Includes intersegment sales of steam coal.
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Surface Mining reported an operating income increase of $5.1 million in the third quarter of 2009 compared to the same period in 2008. The increase was primarily due to increased selling prices noted above.
Walter Coke
Walter Coke's net sales and revenues decreased $30.4 million for the three
months ended September 30, 2009 compared to the same period in 2008 reflecting
decreased customer demand in the weak domestic steel market. The decrease in
demand resulted in a 61.9% decrease in metallurgical coke sales volumes and an
8.9% decrease in average metallurgical coke selling price as shown below:
Three months ended
September 30,
2009 2008
Metallurgical coke average selling price per ton $ 361.95 $ 397.20
Metallurgical coke tons sold 38,478 101,077
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Walter Coke's operating loss was $0.2 million for the three months ended September 30, 2009 compared to an operating profit of $14.6 million in the same period in 2008, a decrease of $14.8 million. This operating loss was primarily the result of decreased sales volumes and pricing on a relatively high fixed cost structure.
RESULTS OF OPERATIONS
Summary Operating Results of Operations for the Nine months ended September 30,
2009 and 2008
For the nine months ended September 30, 2009
Underground Surface Walter Cons
(in thousands) Mining Mining Coke Other Elims Total
Net sales $ 603,812 $ 70,088 $ 63,596 $ 544 $ (16,538 ) $ 721,502
Miscellaneous income 3,858 3,439 268 1,495 - 9,060
Net sales and
revenues 607,670 73,527 63,864 2,039 (16,538 ) 730,562
Cost of sales
(exclusive of
depreciation) 354,589 44,650 54,153 167 (17,072 ) 436,487
Depreciation 43,760 6,694 3,418 344 - 54,216
Selling, general &
administrative 18,561 4,034 7,983 20,547 (34 ) 51,091
Postretirement benefits 24,150 184 (395 ) (802 ) - 23,137
Amortization of
intangibles - 335 - - - 335
Operating income
(loss) $ 166,610 $ 17,630 $ (1,295 ) $ (18,217 ) $ 568 $ 165,296
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For the nine months ended September 30, 2008
Underground Surface Walter Cons
(in thousands) Mining Mining Coke Other Elims Total
Net sales $ 617,069 $ 46,358 $ 157,113 $ 1,601 $ (47,319 ) $ 774,822
Miscellaneous income 5,173 2,245 761 1,150 (4 ) 9,325
Net sales and
revenues 622,242 48,603 157,874 2,751 (47,323 ) 784,147
Cost of sales
(exclusive of
depreciation) 376,110 36,614 95,953 181 (46,246 ) 462,612
Depreciation 30,218 3,885 3,033 697 - 37,833
Selling, general &
administrative 14,690 2,261 10,943 22,182 (383 ) 49,693
Postretirement
benefits 21,860 (15 ) (484 ) (786 ) - 20,575
Amortization of
intangibles - 206 - - - 206
Operating income
(loss) $ 179,364 $ 5,652 $ 48,429 $ (19,523 ) $ (694 ) $ 213,228
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Dollar Variance for the nine months ended September 30, 2009 versus 2008
Underground Surface Walter Cons
(in thousands) Mining Mining Coke Other Elims Total
Net sales $ (13,257 ) $ 23,730 $ (93,517 ) $ (1,057 ) $ 30,781 $ (53,320 )
Miscellaneous
income (1,315 ) 1,194 (493 ) 345 4 (265 )
Net sales and
revenues (14,572 ) 24,924 (94,010 ) (712 ) 30,785 (53,585 )
Cost of sales
(exclusive of
depreciation) (21,521 ) 8,036 (41,800 ) (14 ) 29,174 (26,125 )
Depreciation 13,542 2,809 385 (353 ) - 16,383
Selling,
general &
administrative 3,871 1,773 (2,960 ) (1,635 ) 349 1,398
Postretirement
benefits 2,290 199 89 (16 ) - 2,562
Amortization of
intangibles - 129 - - - 129
Operating
income (loss) $ (12,754 ) $ 11,978 $ (49,724 ) $ 1,306 $ 1,262 $ (47,932 )
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Net sales and revenues for the nine months ended September 30, 2009 decreased $53.6 million, or 6.8% from the same period in 2008. This decline in revenues resulted from decreased revenues in the Walter Coke segment due to lower volumes and average sales price of metallurgical coke as well as decreased revenues in the Underground Mining segment. The reduction in Underground Mining's revenues was principally due to lower natural gas revenues driven by lower pricing, lower volumes of hard coking coal sold and the sale of carbon credits in 2008 which did not occur in 2009. These decreases within the Underground Mining segment were offset in part by an increase in the average selling price of hard coking coal. Revenues from the Surface Mining segment also increased primarily due to an improvement in average selling prices.
Cost of sales, exclusive of depreciation, decreased $26.1 million for the nine months ended September 30, 2009 compared to the same period of 2008. The primary reasons for the decrease are reduced sales volumes at Walter Coke and Underground Mining as well as decreased natural gas costs, offset in part by increased volumes at Surface Mining. Cost of sales represented 60.5% of net sales for the nine month period ended September 30, 2009, up slightly from 59.7% for the same period in 2008.
Depreciation for the nine months ended September 30, 2009 increased $16.4 million compared to the same period in 2008. The increase was primarily due to our continued investment in the expansion of Underground Mining's mine operations and the inclusion of a full quarter of Taft's depreciation in the third quarter of 2009 compared to only one month in 2008.
Interest expense on other debt decreased $8.4 million for the nine months ended September 30, 2009, primarily as a result of a reduction in both the weighted average borrowings for the period and the weighted average interest rate.
Our effective tax rate for the nine months ended September 30, 2009 and 2008 was 28.5% and 29.9%, respectively. Both the 2009 and 2008 effective tax rates differ from the Federal statutory rate primarily due to the benefits from percentage depletion deductions.
The current and prior year period results also include the impact of the factors discussed in the following segment analysis.
Segment Analysis
. . .
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