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Walter Misses, Guidance Intact

Zacks Equity Research

Metallurgical coal producer  Walter Energy Inc.’s (WLT) operating earnings per share in the first quarter of 2012 were 65 cents versus $1.53 reported in the year-ago quarter. Earnings were also lower than the Zacks Consensus Estimate of 79 cents per share.

The year-over-year decline in earnings per share was attributable to losses incurred in its Canadian and UK operations, increase in interest expenses and U.S. operating costs.

Revenue

Walter Energy’s total revenue of $632.0 million in the first quarter was higher than $409 million reported in the year-ago quarter. The year-over-year growth was due to increased sales volume of the higher-margin hard coking coal (HCC).

However, the top line was lower than the Zacks Consensus Estimate of $681 million.

Sales and Production

During the quarter, Walter Energy’s metallurgical coal sales reached 3.0 million metric tons (MMT’s), practically twice the volume produced in the year-ago quarter. The growth in production volumes was primarily attributable to increased production available from the acquisition of Western Coal.

Out of the total coal production in the first quarter, 2.4 MMT’s were higher-margin hard coking coal (HCC), while the balance were pulverized coal injection (:PCI) coal.

Sales volume during the reported quarter touched 2.4 MMT’s comprising 1.9 MMT of HCC and the balance PCI.

Operational Update

The average cash cost per ton in the quarter under review was $136.05 versus $99.55 per ton in the year-ago quarter.

First quarter operating profit at Walter Energy totaled $87.1 million, down sharply 29.8% from last year, impacted mainly by higher per ton production costs.

Interest expenses were $28.1 million versus $3.6 million in the prior-year quarter.

Financial Update

The company continues to maintain a healthy cash balance. Cash and cash equivalents as of March 31, 2012 were $138.2 million versus $128.4 million as of December 31, 2011.

Long-term debt increased marginally from the year-end level. Long-term debt as of March 31, 2012 was $2.31 billion versus $2.27 billion as of December 31, 2011.

In the first quarter, capital expenditure was $120.8 million compared with $44.3 million in the year-ago quarter. The increase was mainly due to $84.2 million invested in the Canadian and U.K. operations. During the quarter the company invested $36.1 million in U.S. operation, a decline of $8 million from the year-ago quarter.

Cash from operating activities during the quarter was $70.9 million versus $148.5 million in the year-ago period. The decline was attributable to lower net income and also the unfavorable movements of current assets.

Guidance

Walter Energy expects its total coal production in 2012 to be in the band of 11.5 and 13 MMTs. Out the total production 75% to 80% will be HCC and the balance will be the low-vol PCI coal.

Peer Comparison

Arch Coal, Inc. (ACI), which competes with Walter Energy, reported pro forma loss of 4 cents per share for the first quarter of 2012 versus earnings of 36 cents per share in the year-ago comparable period.

Arch's total revenue of $1,039.7 million in the first quarter 2012 missed the Zacks Consensus Estimate of $1,161 million. The quarterly revenue improved from the year-ago figure of $873 million, reflecting higher sales prices.

Our view

Despite registering year-over-year growth in production and sales volume during the reported quarter, Walter Energy failed to match up to our expectation. The losses from the Canadian and U.K. operations and higher cash per ton of coal production impacted results.

Walter Energy has decided to shift coal production to more profitable mines in Alabama and Canada, a ploy to negate the impact of higher cost of production.

Birmingham, Alabama-based Walter Energy is one of the leading US producers and exporters of premium met coal to the global steel industry. Walter Energy currently retains a Zacks #3 Rank which translates into a short-term Hold rating.

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