Narrower-than Expected Loss at Walter Energy

Zacks

Metallurgical coal producer Walter Energy Inc.’s (WLT) operating loss per share in the first quarter of 2013 was 64 cents, much narrower than the Zacks Consensus Estimate of a loss of 88 cents. In the year-ago quarter the company reported earnings of 78 cents.

GAAP loss during the quarter was 79 cents per share versus earnings of 65 cents in the year-ago quarter.

The difference between operating and GAAP loss during the quarter under review was due to a charge of 8 cents related to curtailment of production at the Willow Creek mine and a 7 cent charge related to proxy contest expenses.

Revenue

Walter Energy’s total revenue of $491.3 million in the first quarter was down 22.2% from $631.6 million reported in the year-ago period.

Despite a 17% year-over-year increase in metallurgical coal sales volume in the reported quarter, the lower sales price per metric ton (MT) of coal hurt total revenues. Coal sales price of $154 per MT declined 31.6% year over year.

The top-line results were 6.8% lower than the Zacks Consensus Estimate of $527 million.

Highlights of the Quarter

During the quarter, Walter Energy’s metallurgical coal production reached 2.8 million metric tons (MMTs), increasing 12% sequentially. The production consisted of 82% met coal and 18% pulverized coal injection (PCI) coal.

Total cash cost of sales during the quarter was $420.9 million, down 2.2% from the year-ago level.

The company continues to benefit from its cost-cutting measures. Selling, general and administrative expenses were $30.7 million, down 15.4% from $36.3 million in the year-earlier quarter.

The cost cutting initiatives of Walter Energy have started to show its results, but the lower sales price per ton of coal offset much of the benefit.

Interest expenses were $52.6 million versus $28.1 million in the prior-year quarter. The increase in expenses was primarily due to the issue of new debts.

Financial Update

The company continues to maintain a healthy cash balance. The available liquidity at the end of the quarter was $560 million, consisting of cash and cash equivalents of $236 million plus $324 million of availability under the company’s revolving credit facility.

Long-term debt as of Mar 31, 2013 was $2.59 billion versus $2.40 billion as of Dec 31, 2012.

In the first quarter, capital expenditure was $34 million compared with $120.9 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 2013 is $170 million, down $50 million from the original capital expenditure plan.

Other Company Releases

Peabody Energy Corporation (BTU) reported an operating loss of 5 cents per share in the first quarter, narrower than the Zacks Consensus Estimate of a pro forma loss of 14 cents per share.

Arch Coal Inc. (ACI) reported first-quarter 2013 pro forma loss of 34 cents per share, marginally wider than the Zacks Consensus Estimate of a loss of 32 cents.

CONSOL Energy Inc. (CNX) reported earnings of 19 cents per share for the first quarter of 2013, a penny short of the Zacks Consensus Estimate.

Our View

Walter Energy is predominantly a metallurgical coal producer and the possibility of recovery in global steel demand, in 2013, could result in higher demand for met coal.

Walter Energy expects sales price per ton for met coal to improve sequentially in the second quarter. However, we believe that this might not be enough for Walter Energy to report earnings in the green in the next quarter.

Birmingham, Ala. based Walter Energy was founded in 1946. It 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 $1.10 billion, the company has 4,100 full time employees. The company currently has a Zacks Rank #3 (Hold).
 

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