Alpha Natural Resources Inc. Earnings: Margins Suffer for Five Quarters Straight

The Cheat Sheet

Alpha Natural Resources Inc. reported a drop to a loss in the fourth quarter driven by higher costs. Alpha Natural Resources is a supplier and exporter of metallurgical coal for use in the steel-making process and a major supplier of thermal coal to electric utilities and manufacturing industries across the country.

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Alpha Natural Resources Earnings Cheat Sheet for the Fourth Quarter

Results: Reported a loss of $733.3 million ($3.34 per diluted share) in the quarter. The industrial metals and minerals company had net income of $10.8 million or 9 cents per share in the year-earlier quarter.

Revenue: Rose more than twofold to $2.07 billion from the year-earlier quarter.

Actual vs. Wall St. Expectations: Alpha Natural Resources Inc. reported an adjusted net loss of 7 cents per share. By that measure, the company fell short of mean estimate of 27 cents per share. It fell short of the average revenue estimate of $2.16 billion.

Quoting Management: “In early February, Alpha announced cutbacks that are expected to reduce 2012 shipments by approximately four million tons,” said Kevin Crutchfield, Alpha’s chief executive officer. “This decision, which affects several hundred employees in Kentucky and West Virginia, was not made lightly. We will do everything in our power to ensure that all affected employees are treated fairly, with dignity and respect. A variety of market conditions, including competition from natural gas which recently hit decade low prices, regulatory-driven plant retirements, unusually mild winter weather, and weak demand for certain coal products, all led to the conclusion that these actions were necessary.”

“For the full year 2011, the Company achieved record revenue and adjusted EBITDA from continuing operations driven in large part by the acquisition of Massey, which propelled Alpha into the position of the world’s third largest metallurgical coal supplier. However, market conditions have changed rapidly during the last few months, and the fourth quarter 2011 adjusted EBITDA from continuing operations of $261 million fell short of our expectations. The changing market environment, coupled with revised expectations of future operating costs at our Eastern operations, resulted in a goodwill impairment charge in the fourth quarter. In response to these changing market conditions, we moved swiftly to adjust our production levels in order to match anticipated demand for our products going forward. Alpha will remain focused on execution in the most critical areas: completing the successful integration of the legacy Massey operations; setting the industry standard for compliance and safety performance; and continuing our unbroken history of generating positive free cash flow every year. In order to maximize free cash flow and therefore shareholder value, we will follow a three-pronged approach by: supporting and augmenting our metallurgical coal franchise; creating a sustainable steam coal portfolio; and taking appropriate actions to address operations that are unable to contribute to a sustainable portfolio.”

Key Stats:

For the past five quarters, the company has seen double-digit year-over-year percentage revenue growth. Over that span, the company has averaged growth of 66.3%, with the biggest boost coming in the third quarter when revenue rose more than twofold from the year earlier quarter.

Last quarter was the fifth in a row that the company saw shrinking gross margins, as they fell 5.8 percentage points from the year-earlier quarter to 14.5%. Over that time, margins have contracted on average 6.3 percentage points per quarter on a year-over-year basis.

The company fell short of estimates last quarter after beating the mark the quarter before with net income of 35 cents versus a mean estimate of net income of 10 cents per share.

Last quarter, the company reported a net loss that marked a turn from the previous quarter’s profit. In the second quarter, the company booked a profit of $56.4 million, or 36 cents per share.

Looking Forward: Expectations for the company’s next-quarter results are lower than they have been. Over the past sixty days, the average estimate for first quarter of the next fiscal year has fallen from 46 cents per share to 25 cents. In the past month, the average estimate for the fiscal year has fallen from $2.15 per share to $2.12 abs.

(Company fundamentals provided by Xignite Financials. Earnings estimates provided by Zacks)

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To contact the reporter on this story: Derek Hoffman at staff.writers@wallstcheatsheet.com

To contact the editor responsible for this story: Damien Hoffman at editors@wallstcheatsheet.com

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