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| ICO > SEC Filings for ICO > Form 10-Q on 7-Nov-2008 | All Recent SEC Filings |
7-Nov-2008
Quarterly Report
Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements that are not statements of historical fact and may involve a number of risks and uncertainties. We have used the words "anticipate," "believe," "could," "estimate," "expect," "intend," "may," "plan," "predict," "project" and similar terms and phrases, including references to assumptions, in this report to identify forward-looking statements. These forward-looking statements are made based on expectations and beliefs concerning future events affecting us and are subject to uncertainties and factors relating to our operations and business environment, all of which are difficult to predict and many of which are beyond our control, that could cause our actual results to differ materially from those matters expressed in or implied by these forward-looking statements. The following factors are among those that may cause actual results to differ materially from our forward-looking statements:
• market demand for coal, electricity and steel;
• availability of qualified workers;
• future economic or capital market conditions;
• weather conditions or catastrophic weather-related damage;
• our production capabilities;
• consummation of financing, acquisition or disposition transactions and the effect thereof on our business;
• a significant number of conversions of our Convertible Senior Notes prior to maturity;
• our plans and objectives for future operations and expansion or consolidation;
• our relationships with, and other conditions affecting, our customers;
• availability and costs of key supplies or commodities such as diesel fuel, steel, explosives and tires;
• availability and costs of capital equipment;
• prices of fuels which compete with or impact coal usage, such as oil and natural gas;
• timing of reductions or increases in customer coal inventories;
• long-term coal supply arrangements;
• risks in or related to coal mining operations, including risks relating to third-party suppliers and carriers operating at our mines or complexes;
• unexpected maintenance and equipment failure;
• environmental, safety and other laws and regulations, including those directly affecting our coal mining and production, and those affecting our customers' coal usage;
• ability to obtain and maintain all necessary governmental permits and authorizations;
• competition among coal and other energy producers in the United States and internationally;
• railroad, barge, trucking and other transportation availability, performance and costs;
• employee benefits costs and labor relations issues;
• replacement of our reserves;
• our assumptions concerning economically recoverable coal reserve estimates;
• availability and costs of credit, surety bonds and letters of credit;
• title defects or loss of leasehold interests in our properties which could result in unanticipated costs or inability to mine these properties;
• future legislation and changes in regulations or governmental policies or changes in interpretations thereof, including with respect to safety enhancements and environmental initiatives relating to global warming;
• impairment of the value of our goodwill and long-lived assets;
• ongoing effects of the Sago mine accident;
• our liquidity, results of operations and financial condition;
• adequacy and sufficiency of our internal controls; and
• legal and administrative proceedings, settlements, investigations and claims and the availability of related insurance coverage.
You should keep in mind that any forward-looking statement made by us in this Quarterly Report on Form 10-Q speaks only as of the date on which we make it. New risks and uncertainties arise from time-to-time, and it is impossible for us to predict these events or how they may affect us. We have no duty to, and do not intend to, update or revise the forward-looking statements in this report after the date of this report, except as may be required by law. In light of these risks and uncertainties, you should keep in mind that any forward-looking statement made in this report might not occur. When considering these forward-looking statements, you should keep in mind the cautionary statements in this document and in our other SEC filings, including the more detailed discussion of these factors, as well as other factors that could affect our results, contained in Item 3, "Quantitative and Qualitative Disclosures About Market Risk," as well as in the "Risks Relating to Our Business" section of Item 1A of our 2007 Annual Report on Form 10-K.
RESULTS OF CONTINUING OPERATIONS
Three months ended September 30, 2008 compared to the three months ended September 30, 2007
Revenues, coal sales revenues by segment and tons sold by segment
The following table depicts revenues for the three months ended September 30, 2008 and 2007 for the indicated categories:
Three months ended Increase
September 30, (Decrease)
2008 2007 $ or Tons %
(in thousands, except percentages and per ton data)
Coal sales revenues $ 282,250 $ 191,088 $ 91,162 48 %
Freight and handling revenues 12,339 5,044 7,295 145 %
Other revenues 14,610 11,697 2,913 25 %
Total revenues $ 309,199 $ 207,829 $ 101,370 49 %
Tons sold 4,794 4,518 276 6 %
Coal sales revenue per ton $ 58.87 $ 42.29 $ 16.58 39 %
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The following table depicts coal sales revenues by operating segment for the three months ended September 30, 2008 and 2007:
Three months ended Increase
September 30, (Decrease)
2008 2007 $ %
(in thousands, except percentages)
Central Appalachian $ 198,812 $ 133,621 $ 65,191 49 %
Northern Appalachian 52,531 29,734 22,797 77 %
Illinois Basin 18,530 15,742 2,788 18 %
Ancillary 12,377 11,991 386 3 %
Total coal sales revenues $ 282,250 $ 191,088 $ 91,162 48 %
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The following table depicts tons sold by operating segment for the three months ended September 30, 2008 and 2007:
Three months ended Increase
September 30, (Decrease)
2008 2007 Tons %
(in thousands, except percentages)
Central Appalachian 3,022 2,906 116 4 %
Northern Appalachian 918 795 123 15 %
Illinois Basin 619 525 94 18 %
Ancillary 235 292 (57 ) (20 )%
Total tons sold 4,794 4,518 276 6 %
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Coal sales revenues-Coal sales revenues are derived from sales of produced coal and brokered coal contracts. The increase in coal sales revenues was primarily due to a 39% increase in sales realization per ton resulting from increased spot market and short-term contract sales entered into in order to capitalize on favorable market conditions. Further impacting the increase in coal sales revenue was a 6% increase in tons sold compared to the same period in 2007.
Central Appalachian. Coal sales revenues from our Central Appalachian segment for the three months ended September 30, 2008 increased over the same period in 2007 primarily due to an increase of $19.80 per ton, which was driven by higher average prices of our coal sold pursuant to coal supply agreements and from increased sales of metallurgical coal.
Northern Appalachian. For the three months ended September 30, 2008, our Northern Appalachian coal sales revenues increased due to an increase in coal sales revenues of $19.82 per ton resulting from higher average prices of coal sold pursuant to coal supply agreements and from an increase in sales of metallurgical coal. Additionally, we experienced an increase in tons sold at certain of our complexes. The increase in tons sold is due to the ramp up of production at the formerly idled Harrison operation, as well as increased production resulting from investments in capital improvements made during preceding periods.
Illinois Basin. The increase in coal sales revenues from our Illinois Basin segment was due to an 18% increase in tons sold resulting from increased short-term contract sales.
Ancillary. Our Ancillary segment's coal sales revenues are comprised of coal sold under brokered coal contracts. We experienced an $11.59 per ton increase in the price of brokered coal sold due to improved market conditions. This increase was partially offset by a decrease in tons sold due to the expiration of certain brokered coal contracts.
Freight and handling revenues-Freight and handling revenues represent reimbursement of freight and handling costs for certain shipments for which we initially pay the costs and are then reimbursed by the customer. Freight and handling revenues and costs increased primarily due to increased fuel surcharges and transportation rates. Additionally, we have entered into new sales contracts that have increased freight and handling revenues and costs.
Other revenues-The increase in other revenues for the three months ended September 30, 2008 was primarily due to increases in ash disposal income, royalty income and revenue generated from coalbed methane wells owned jointly by our subsidiary CoalQuest and CDX Gas, LLC ("CDX"). Partially offsetting the increase in revenue was a decrease in shop sales revenue from our ADDCAR subsidiary.
Cost and expenses
The following table reflects cost of operations for the three months ended September 30, 2008 and 2007:
Three months ended Increase
September 30, (Decrease)
2008 2007 $ %
(in thousands, except percentages and per ton data)
Cost of coal sales $ 240,204 $ 188,356 $ 51,848 28 %
Freight and handling costs 12,339 5,044 7,295 145 %
Cost of other revenues 9,690 7,600 2,090 28 %
Depreciation, depletion and amortization 24,227 23,017 1,210 5 %
Selling, general and administrative expenses 8,396 9,026 (630 ) (7 )%
Gain on sale of assets (6,383 ) (35,444 ) 29,061 82 %
Total costs and expenses $ 288,473 $ 197,599 $ 90,874 46 %
Cost of coal sales per ton sold $ 50.10 $ 41.69 $ 8.41 20 %
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The following table depicts cost of coal sales by operating segment for the three months ended September 30, 2008 and 2007:
Three months ended Increase
September 30, (Decrease)
2008 2007 $ %
(in thousands, except percentages)
Central Appalachian $ 164,193 $ 125,896 $ 38,297 30 %
Northern Appalachian 50,494 37,967 12,527 33 %
Illinois Basin 15,921 12,360 3,561 29 %
Ancillary 9,596 12,133 (2,537 ) (21 )%
Total cost of coal sales $ 240,204 $ 188,356 $ 51,848 28 %
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Cost of coal sales-For the three months ended September 30, 2008, our total cost of coal sales increased primarily as a result of a 20% increase in cost per ton, as well as a 6% increase in tons sold as described above.
Central Appalachian. Cost of coal sales from our Central Appalachian segment increased to $54.32 per ton for the three months ended September 30, 2008 from $43.32 per ton for the same period in 2007 primarily as a result of increases in labor and benefit costs and diesel fuel costs. Labor and benefit costs have increased due to a tightening labor market resulting in the need to offer more competitive compensation packages. Diesel fuel costs have increased over 2007 as a result of higher per gallon fuel costs and additional gallons being used. Further impacting the increase in cost of coal sales were increases in repairs and maintenance expense, blasting supplies, roof control supplies, royalties, contract miner costs, severance tax expense and trucking costs.
Northern Appalachian. Our Northern Appalachian segment cost of coal sales per ton increased to $55.00 per ton for the three months ended September 30, 2008 from $47.76 per ton for the same period in 2007 due to increases in labor and benefit costs resulting from a tight labor market requiring competitive compensation packages, diesel fuel costs due to higher per gallon prices, repairs and maintenance expense related to several high-dollar repairs, royalties expense, contract mining and trucking costs.
Illinois Basin. For the three months ended September 30, 2008, our Illinois Basin cost of coal sales increased $2.20 per ton primarily due to an increase in repairs and maintenance costs and roof control supplies. Partially offsetting the increases was a decrease in the cost for certain types of employee insurance coverage.
Ancillary. Cost of coal sales from our Ancillary segment decreased for the three months ended September 30, 2008 primarily due to decreased purchased coal related to the expiration of certain brokered coal contracts.
Cost of other revenues-The increase in cost of other revenues was primarily due to increases in ash disposal transportation costs and gathering fees related to coalbed methane wells owned jointly by our subsidiary, CoalQuest, and CDX.
Depreciation, depletion and amortization-Depreciation, depletion and amortization expense increased for the three months ended September 30, 2008 compared to the same period in 2007. The principal component of the increase was due to decreased amortization income on below-market coal agreements and an increase in depreciation and amortization expense on coal mining property and equipment. The increases were partially offset by a decrease in depreciation of coalbed methane well development costs.
Selling, general and administrative expenses-The decrease in selling, general and administrative expenses for the three months ended September 30, 2008 compared the same period in 2007 was primarily due to a decreases in legal and professional fees and labor and benefit costs. The decrease was partially offset by increases in bad debt expense, sales commissions and computer expenses.
Gain on sale of assets-Gain on sale of assets decreased for the three months ended September 30, 2008 from the comparable period in 2007. The gain for the third quarter of 2008 related primarily to the sale of a used highwall mining system, a real estate exchange and the disposition of other assets. The gain recognized in the comparable period of 2007 was primarily attributable to the sale of the Denmark property.
Adjusted EBITDA by Segment
Adjusted EBITDA represents net income or loss before deducting interest expense, income taxes, depreciation, depletion, amortization and minority interest. Adjusted EBITDA is presented because it is an important supplemental measure of our performance used by our chief operating decision maker in such areas as capital investment and allocation of resources. It is considered "adjusted" as we adjust EBITDA for minority interest. Other companies in our industry may calculate Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure. Adjusted EBITDA is reconciled to its most comparable GAAP measure on page 21 and in the notes to our condensed consolidated financial statements for the three months ended September 30, 2008 appearing elsewhere in this Quarterly Report on Form 10-Q.
The following table depicts segment Adjusted EBITDA for the three months ended September 30, 2008 and 2007:
Three months ended Increase
September 30, (Decrease)
2008 2007 $ %
(in thousands, except percentages)
Central Appalachian $ 36,779 $ 7,391 $ 29,388 398 %
Northern Appalachian 3,796 (8,233 ) 12,029 146 %
Illinois Basin 3,924 3,790 134 4 %
Ancillary 454 30,728 (30,274 ) (99 )%
Total Adjusted EBITDA $ 44,953 $ 33,676 $ 11,277 33 %
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Adjusted EBITDA from our Central Appalachian segment increased for the three months ended September 30, 2008 compared to the three months ended September 30, 2007 due an increase in profit margins of $8.80 per ton and an increase in 116,000 tons sold.
The increase in Adjusted EBITDA from our Northern Appalachian segment for the three months ended September 30, 2008 was due to a combination of an increase in sales realizations of $19.82 per ton, resulting in increased profit margins of $12.57 per ton, as well as an increase of approximately 123,000 tons sold.
Adjusted EBITDA from our Illinois Basin segment increased during the three months ended September 30, 2008 primarily due to increased sales of approximately 94,000 tons. The increase was partially offset by a decrease in profit margins of $2.22 per ton.
The decrease in Adjusted EBITDA from our Ancillary segment was primarily due to the sale of the Denmark property that occurred during the quarter ended September 30, 2007. The decrease was partially offset by an increase in profit margins of $12.31 per ton on brokered coal sales.
Reconciliation of Adjusted EBITDA to Net income (loss) by Segment
The following tables reconcile Adjusted EBITDA to net income (loss) by segment for the three months ended September 30, 2008 and 2007:
Three months ended Increase
September 30, (Decrease)
2008 2007 $ %
(in thousands, except percentages)
Central Appalachian
Net income (loss) $ 20,280 $ (7,920 ) $ 28,200 356 %
Depreciation, depletion and amortization 16,004 14,917 1,087 7 %
Interest expense, net 495 394 101 26 %
Adjusted EBITDA $ 36,779 $ 7,391 $ 29,388 398 %
Three months ended Increase
September 30, (Decrease)
2008 2007 $ %
(in thousands, except percentages)
Northern Appalachian
Net loss $ (1,467 ) $ (11,431 ) $ 9,964 87 %
Depreciation, depletion and amortization 5,078 3,204 1,874 58 %
Interest expense, net 187 131 56 43 %
Minority interest (2 ) (137 ) 135 99 %
Adjusted EBITDA $ 3,796 $ (8,233 ) $ 12,029 146 %
Three months ended Increase
September 30, (Decrease)
2008 2007 $ %
(in thousands, except percentages)
Illinois Basin
Net income $ 2,204 $ 2,295 $ (91 ) (4 )%
Depreciation, depletion and amortization 1,658 1,436 222 15 %
Interest expense, net 62 59 3 5 %
Adjusted EBITDA $ 3,924 $ 3,790 $ 134 4 %
Three months ended Increase
September 30, (Decrease)
2008 2007 $ %
(in thousands, except percentages)
Ancillary
Net income (loss) $ (11,309 ) $ 15,773 $ (27,082 ) (172 )%
Depreciation, depletion and amortization 1,487 3,460 (1,973 ) (57 )%
Interest expense, net 8,093 13,850 (5,757 ) (42 )%
Income tax expense (benefit) 2,183 (2,355 ) 4,538 193 %
Adjusted EBITDA $ 454 $ 30,728 $ (30,274 ) (99 )%
Three months ended Increase
September 30, (Decrease)
2008 2007 $ %
(in thousands, except percentages)
Consolidated
Net income (loss) $ 9,708 $ (1,283 ) $ 10,991 857 %
Depreciation, depletion and amortization 24,227 23,017 1,210 5 %
Interest expense, net 8,837 14,434 (5,597 ) (39 )%
Income tax expense (benefit) 2,183 (2,355 ) 4,538 193 %
Minority interest (2 ) (137 ) 135 99 %
Adjusted EBITDA $ 44,953 $ 33,676 $ 11,277 33 %
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Nine months ended September 30, 2008 compared to the nine months ended September 30, 2007
Revenues, coal sales revenues by segment and tons sold by segment
The following table depicts revenues for the nine months ended September 30, 2008 and 2007 for the indicated categories:
Nine months ended Increase
September 30, (Decrease)
2008 2007 $ or Tons %
(in thousands, except percentages and per ton data)
Coal sales revenues $ 761,963 $ 592,081 $ 169,882 29 %
Freight and handling revenues 35,492 14,645 20,847 142 %
Other revenues 41,554 37,467 4,087 11 %
Total revenues $ 839,009 $ 644,193 $ 194,816 30 %
Tons sold 14,502 13,945 557 4 %
Coal sales revenue per ton $ 52.54 $ 42.46 $ 10.08 24 %
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The following table depicts coal sales revenues by operating segment for the nine months ended September 30, 2008 and 2007:
Nine months ended Increase
September 30, (Decrease)
2008 2007 $ %
(in thousands, except percentages)
Central Appalachian $ 512,537 $ 393,527 $ 119,010 30 %
Northern Appalachian 157,528 87,734 69,794 80 %
Illinois Basin 52,619 46,727 5,892 13 %
Ancillary 39,279 64,093 (24,814 ) (39 )%
Total coal sales revenues $ 761,963 $ 592,081 $ 169,882 29 %
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The following table depicts tons sold by operating segment for the nine months ended September 30, 2008 and 2007:
Nine months ended Increase
September 30, (Decrease)
2008 2007 Tons %
(in thousands, except percentages)
Central Appalachian 8,908 8,545 363 4 %
Northern Appalachian 2,969 2,422 547 23 %
Illinois Basin 1,762 1,563 199 13 %
Ancillary 863 1,415 (552 ) (39 )%
Total tons sold 14,502 13,945 557 4 %
. . .
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