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Walter Energy Lags on Lower Volume

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Metallurgical coal producer Walter Energy Inc.’s operating earnings per share in the third quarter of 2012 were 48 cents versus $1.21 reported in the year-ago quarter. Earnings were lower than the Zacks Consensus Estimate of 55 cents.

GAAP loss during the quarter was $16.97 per share versus earnings of $1.39 per share reported in the year-ago quarter.

The difference between operating and GAAP earnings during the quarter under review was due to a non-cash goodwill impairment charge of $1.1 billion and a charge of $40 million for abandonment of a natural gas exploration project. The results during the quarter included a $41 million tax benefit.


Walter Energy’s total revenue of $611.9 million in the third quarter was lower than $688.7 million reported in the year-ago period.

The year-over-year decline was due to global slackness in the demand for coal accompanied by an excess of supply. The contribution from the Canadian and U.K. operations of the company dropped 41.1% year over year.

The top-line results were also lower than the Zacks Consensus Estimate of $669 million.

Sales and Production

During the quarter, Walter Energy’s metallurgical coal production reached 3.33 million metric tons (MMTs), up 47% from the year-ago quarter. The production consisted of 71% met coal and 29% pulverized coal injection (PCI) coal.

Sales volume during the reported quarter touched 2.62 MMTs comprising 2.18 MMT of HCC and the balance PCI.

Operational Update

During the quarter the company successfully implemented cost-cutting measures. Selling, general and administrative expenses were $32.5 million, down 24.6% from $43.1 million in the year-earlier quarter.

Third quarter operating profit at Walter Energy totaled $34.9 million, down sharply 77.9% from the same period last year, due to operating losses incurred at its Canadian and U.K. operations.

Interest expenses were $30.5 million versus $27.6 million in the prior-year quarter.

Financial Update

The company continues to maintain a healthy cash balance. Cash and cash equivalents as of September 30, 2012 were $129.9 million versus $128.4 million as of December 31, 2011.

Long-term debt as of September 30, 2012 was $2.28 billion versus $2.27 billion as of December 31, 2011.

In the third quarter, capital expenditure was $85.2 million compared with $156.9 million in the year-ago quarter. The decline in capital expenditure reflects Walter Energy’s capital discipline in the face of a worldwide decline in coal demand.

The capital expenditure target of the company for 2012 is $400 million. Keeping in mind the sputtering global economy, the company has decided to lower its capital expenditure for 2013 to $220 million.

Cash from operating activities during the first nine months of 2012 was $333 million versus $509.6 million in the year-ago period.

Peer Comparison

Arch Coal, Inc. , another operator in the coal sector, reported pro forma earnings of 20 cents per share for the third quarter of 2012 versus earnings of 17 cents per share in the year-ago comparable period. The results were significantly higher than the Zacks Consensus Estimate of a loss of 15 cents per share.

Arch's total revenue of $1,087.6 million in the third quarter 2012 was lower than the year-ago figure of $1,198.7 million. However, the top line was higher than the Zacks Consensus Estimate of $1,033.0 million.

Our View

The slackness in demand for coal globally has impacted the performance of the company. With the uncertain recovery of the coal market, we expect the company to trim its production level in the upcoming quarter to clear the inventory of both HCC and PCI coal.

Following the same thesis, the company has cut its production guidance for 2013 from estimated 2012 levels.

Losses incurred at the U.K. and Canadian operations have also weighed upon the company. Earnings have missed our expectation in three out of the last four quarters. These trends show there will be no recovery soon in the coming months. With no near-term positive catalyst the stock currently retains a short-term Zacks #5 Rank (Strong Sell rating.)

Birmingham, Alabama-based Walter Energy is one of the leading U.S. producers and exporters of premium met coal catering to the global steel industry. With a market capitalization of $2.28 billion, the company has 4,200 full time employees.

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