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| WLT > SEC Filings for WLT > Form 10-Q on 8-May-2009 | All Recent SEC Filings |
8-May-2009
Quarterly Report
This discussion should be read in conjunction with the condensed consolidated financial statements and notes thereto of Walter Energy, Inc. and its subsidiaries, particularly Note 12 of "Notes to Condensed Consolidated Financial Statements," which provides the Company's net sales and revenues and operating income by reportable segment.
DISCONTINUED OPERATIONS
As more fully discussed in Note 2 of "Notes to Consolidated Financial Statements," the Company announced the permanent closure of the underground coal mine owned by the Kodiak Mining Company LLC ("Kodiak") in December 2008, the controlling interest of which is held by United Land Corporation, due to high operational costs, difficult operating conditions and a challenging pricing environment for Kodiak's product. As such, the operating results, assets and liabilities, and cash flows of Kodiak have been reported apart from the Company's continuing operations as "discontinued operations" for all periods presented. Loss from discontinued operations includes the net operating results of the Kodiak business. Additionally, discontinued operations for the quarter ended March 31, 2009, includes a charge of $0.7 million, net of tax, related to the resolution of a legal matter for Crestline of NC, Inc., f/k/a Crestline Homes, Inc., which was sold in May 2007.
RESULTS OF OPERATIONS
Summary Operating Results of Operations for the Three Months Ended March 31,
2009 and 2008
For the three months ended March 31, 2009
Underground Surface Cons
(in thousands) Mining Mining Sloss Financing Homebuilding Other Elims Total
Net sales $ 241,879 $ 24,418 $ 21,737 $ 3,417 $ 8,548 $ 40 $ (10,275 ) $ 289,764
Interest income on
instalment notes - - - 45,385 - - - 45,385
Miscellaneous
income 2,321 2,200 170 370 2,465 280 - 7,806
Net sales and
revenues 244,200 26,618 21,907 49,172 11,013 320 (10,275 ) 342,955
Cost of sales
(exclusive of
depreciation) 115,776 17,298 16,993 1,562 7,833 13 (9,981 ) 149,494
Interest
expense(1) - - - 23,089 - - 23,089
Depreciation 14,148 2,326 1,127 78 - 132 - 17,811
Selling, general &
administrative 6,371 1,374 2,326 7,833 4,695 8,598 - 31,197
Provision for
losses on
instalment notes - - - 4,357 - - - 4,357
Postretirement
benefits 8,050 (7 ) (132 ) (117 ) - (267 ) - 7,527
Amortization of
intangibles - 112 - 203 - - - 315
Restructuring &
impairment charges - - - - 1,072 - - 1,072
Operating
income (loss) $ 99,855 $ 5,515 $ 1,593 $ 12,167 $ (2,587 ) $ (8,156 ) $ (294 ) $ 108,093
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For the three months ended March 31, 2008
Underground Surface Cons
(in thousands) Mining Mining Sloss Financing Homebuilding Other Elims Total
Net sales $ 141,683 $ 13,542 $ 50,662 $ 2,570 $ 40,060 $ 0 $ (8,413 ) $ 240,104
Interest income on
instalment notes - - - 48,710 - - - 48,710
Miscellaneous
income 1,521 935 209 824 11 286 - 3,786
Net sales and
revenues 143,204 14,477 50,871 52,104 40,071 286 (8,413 ) 292,600
Cost of sales
(exclusive of
depreciation) 102,734 9,884 28,329 1,770 32,757 - (7,827 ) 167,647
Interest expense(1) - - - 28,308 - - - 28,308
Interest rate hedge
ineffectiveness - - - 16,981 - - - 16,981
Depreciation 9,760 1,130 1,006 135 1,219 232 - 13,482
Selling, general &
administrative 4,097 766 2,997 7,117 14,205 8,645 (79 ) 37,748
Provision for
losses on
instalment notes - - - 4,325 - - - 4,325
Postretirement
benefits 7,287 (6 ) (161 ) (113 ) (152 ) (263 ) - 6,592
Amortization of
intangibles - 72 - 293 - - - 365
Restructuring &
impairment charges - - - - 6,770 - - 6,770
Operating
income (loss) $ 19,326 $ 2,631 $ 18,700 $ (6,712 ) $ (14,728 ) $ (8,328 ) $ (507 ) $ 10,382
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Overview
The Company's net income for the three months ended March 31, 2009 was $73.1 million, or $1.36 per diluted share, which compares to $0.5 million, or $0.01 per diluted share, for the three months ended March 31, 2008. In the three months ended March 31, 2009, net sales and revenues increased $50.4 million and operating income increased $97.7 million versus the same period in 2008. These results were led by increased metallurgical coal pricing and volume from the Underground Mining segment, partially offset by a decrease in revenues and operating income at Sloss due to unfavorable metallurgical coke volumes and pricing.
Outlook and Strategic Initiatives
Walter Industries, Inc. changed its name to Walter Energy, Inc. ("Walter") on April 23, 2009, after receiving stockholder approval. In December 2008, the Company announced the closure of Homebuilding and on April 17, 2009, the Company spun off the Financing segment. These segments are expected to qualify for discontinued operations treatment in the second quarter of 2009. These actions have completed the transformation of Walter Industries, Inc. from a diversified corporation to a pure play natural resources and energy company, now named Walter Energy, Inc.
Beginning with the first quarter of 2009, the reporting segments have been revised to separate the Natural Resources segment into Underground Mining and Surface Mining. Underground Mining includes the Company's underground metallurgical coal operations from the No. 4 and No. 7 mines and the natural gas operations. Surface Mining includes the Company's surface coal mining operations of Tuscaloosa Resources, Inc. ("TRI") and Taft Coal Sales & Associates ("Taft") as well as the United Land Corporation results.
º •
º Approximately 1.8 million tons of metallurgical coal were sold in the
first quarter of 2009 at an average price of $133.24 per short ton, or
$148.00 per metric ton and included approximately 0.2 million tons at
a contractual price of $315.00 per metric ton.
º •
º The global steel industry and worldwide demand for coal continue to
soften. As such, there is limited visibility as to the overall volume
requirements for metallurgical coal over the next twelve months.
Consequently, forecasting beyond the second quarter of 2009 is
difficult at best. The Company has lowered its sales volume
expectation for the second quarter to a range of 0.9 million to
1.0 million tons and forecasts its average operating income at between
$8.00 to $11.00 per ton. As the Company continues negotiating for the
2009-2010 contract year (i.e., April 2009 to March 2010 and July 2009
to June 2010 contract periods), both pricing and volume remain
uncertain and are expected to be lower than the 2008 - 2009 contract
period.
º •
º Coal production costs averaged $51.78 per ton for the quarter ended
March 31, 2009 as compared to $48.47 for the first quarter of 2008. As
worldwide steel demand continues to soften, the Company has adjusted
production to current market conditions by eliminating Saturday
production. Production costs are expected to increase to approximately
$70.00 per ton for the second quarter due to the volume reductions but
also due to a higher ratio of continuous miner tons to longwall tons
at the No. 7 Mine. The Company plans to defer the startup of the Mine
No. 7 East longwall operation until January 2010.
º •
º Demurrage costs in the first quarter of 2009 totaling $3.0 million
decreased by $6.2 million from the first quarter of 2008. Expansion
activities at the Port of Mobile should help contain these costs in
the future. In addition, the Company expects demurrage for the second
quarter of 2009 to decrease or remain at levels similar to the first
quarter of 2009 as a result of negotiated caps in demurrage costs in
many of the 2008-2009 metallurgical coal contracts.
º •
º Freight costs on metallurgical coal sales are projected to average
$14.00 to $15.00 per ton, in 2009. Royalties are expected to average
6.5% to 7.0% of metallurgical coal revenues as the Company moves from
the mining of coal from the Southwest "A" panel in the first quarter
of 2009, which is on properties owned by the Company, to the mining of
coal on properties not owned by the Company and are subject to royalty
payments.
º •
º The natural gas business sold 1.7 billion cubic feet of natural gas at
an average hedged price of $6.05 per thousand cubic feet in the first
quarter of 2009. No future natural gas sales are hedged.
º •
º Although the current market demand and pricing for coal is down as
compared to 2008, the Company will cautiously continue to evaluate
expansion opportunities, potential acquisitions and further
investments in coal and natural gas.
º •
º During the first quarter of 2009, the surface mining operations
produced 294,000 tons of steam and industrial coal and sold 329,000
tons at an average operating income of $6.55 per ton. In the second
quarter of 2009, this business is expected to sell between 330,000
tons and 370,000 tons at an average operating income of between $7.00
to $16.00 per ton, as approximately 90 percent of expected 2009
production has been profitably priced with fixed-price contracts.
º •
º In the first quarter of 2009, the Company completed the expansion of
United Land's barge loadout facility, which adds up to 4.0 million
tons of coal per year of barge shipping capacity.
º •
º The Company will change the name of the United Land subsidiary to
Walter Minerals, Inc. in the second quarter 2009.
º •
º Sloss posted operating income of $1.6 million and sold 45,000 tons of
metallurgical coke in the first quarter of 2009, reflecting a
significant downturn in the steel industry.
º •
º The Company expects continued weak demand and additional selling price
pressures during the remainder of 2009. As a result, metallurgical
coke production will be reduced to approximately 50 percent of
capacity with the possibility of making further reductions if
conditions warrant.
º •
º In the second quarter of 2009, metallurgical coke sales are expected
to range between 34,000 to 40,000 tons at an average operating loss
per ton of between $80.00 and $50.00.
º •
º The Company will change Sloss' name to Walter Coke, Inc. in the second
quarter 2009.
Summary of First Quarter Consolidated Results of Continuing Operations
Net sales and revenues for the three months ended March 31, 2009 were $343.0 million, an increase of $50.4 million, or 17.2% from $292.6 million in the same period in 2008. This increase in revenues primarily resulted from higher metallurgical coal pricing and sales volume in the Underground Mining segment. Surface Mining also contributed to revenue growth due to the addition of revenues from Taft, which was acquired in September 2008. These revenue increases were somewhat offset by declines in metallurgical coke pricing and volumes from Sloss, due to the increasingly softening steel market, and lower revenues from Homebuilding, due to the closure of that business, as well as lower payment income from Financing.
Cost of sales, exclusive of depreciation, decreased $18.2 million to $149.5 million and represented 51.6% of net sales for the three months ended March 31, 2009 versus $167.6 million or 69.8% of net sales for the same period in 2008. Cost of sales in the Underground Mining segment was 47.9% of net sales for the quarter ended March 31, 2009 as compared to 72.5% of net sales for the quarter ended March 31, 2008. This improvement is primarily attributable to increased selling prices as cost of sales per ton remained comparable. Cost of sales in the Surface Mining segment was 70.8% of net sales for the quarter ended March 31, 2009 as compared to 73.0% of net sales for the same period in 2008. This improvement is primarily attributable to increased selling prices offset in part by increased operating costs. Cost of sales at Sloss was 78.2% of net sales versus 55.9% of net sales for the quarters ended March 31, 2009 and 2008, respectively. This deterioration is a result of lower selling prices and volumes on a relatively fixed cost structure as well as increased raw material costs. Cost of sales in the Homebuilding segment also deteriorated to 91.6% of net sales from 81.8% of net sales for the three months ended March 31, 2009 and 2008, respectively, as this business winds down.
Depreciation for the three months ended March 31, 2009 was $17.8 million, an increase of $4.3 million compared to the same period in 2008. The increase was primarily due to continued investment in the expansion of mining operations as well as replacement of certain mining equipment.
Interest expense on mortgage-backed notes was $23.1 million for the three months ended March 31, 2009, down $5.2 million compared to the same period in 2008. This decrease was due to a reduction in the weighted average borrowings outstanding for the three months ended March 31, 2009 as compared to the same period in 2008 resulting primarily from the pay-off and termination of the warehouse facilities in April 2008 totaling $214.0 million, as well as normal repayments on the other securitized notes. The weighted average interest rate for the three months ended March 31, 2009 was also slightly lower as compared to the same period in 2008.
Selling, general & administrative expenses decreased $6.6 million to $31.2 million for the quarter ended March 31, 2009 as compared to the quarter ended March 31, 2008. This decrease was primarily attributable to the winding down of the Homebuilding segment offset in part by an increase in the Underground Mining segment primarily attributable to increased compensation related costs.
The effective tax rate for the three months ended March 31, 2009 and 2008 was 27.9% and 34.6%, respectively. Both the 2009 and 2008 effective tax rates differ from the Federal statutory rate primarily due to the benefit from percentage depletion deductions. Percentage depletion deductions have a bigger effect on the effective tax rate in 2009 due to a change in mix of income from various segments. For example, the Company has estimated income from Financing only through the date of spin-off of April 17, 2009, providing a shift in mix of income from the Financing segment, which is taxed at a higher rate, to the Underground Mining segment, which is taxed at a lower rate, as compared to the mix of income in 2008.
The current and prior year period results also include the impact of the factors discussed in the following segment analysis.
Segment Analysis
Underground Mining
Underground Mining, which includes the operations of Jim Walter Resources
and Blue Creek Coal Sales, reported revenues of $244.2 million in the first
quarter of 2009, an increase of $101.0 million from the same period last year.
The increase in revenues was primarily due to a 57.0% increase in selling prices
for metallurgical coal and an 18.8% increase in tons sold as compared to the
same period in 2008 as shown in the table below:
Three months ended
March 31,
2009 2008
Average coal selling price (per short ton) $ 133.24 $ 84.86
Tons of coal sold (in thousands) 1,754 1,477
Average hedged natural gas selling price (per mcf) $ 6.05 $ 7.96
Billion cubic feet of natural gas sold 1.7 1.6
Number of natural gas wells 432 397
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Underground Mining reported operating income of $99.9 million in the first quarter of 2009, compared to $19.3 million in the same period in 2008. The $80.5 million increase in operating income was primarily the result of the increase in net sales and revenues as discussed above, partially offset by a $13.0 million increase in cost of sales due to additional volumes sold and a $4.4 million increase in depreciation expenses as a result of continued investment in the Mine No. 7 East expansion project and the replacement of certain mining equipment.
Surface Mining, which includes the operations of TRI, Taft and United Land, reported revenues of $26.6 million in the first quarter of 2009, an increase of $12.1 million from the same period last year. The increase in revenues was primarily due to the acquisition of Taft in September 2008 and an
Three months ended
March 31,
2009 2008
Average coal selling price (per short ton) $ 70.48 $ 59.44
Tons of coal sold (in thousands) 329 200
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Surface Mining reported operating income of $5.5 million in the first quarter of 2009, compared to $2.6 million in the same period in 2008. The $2.9 million increase in operating income was almost entirely the result of the inclusion of Taft's results in the 2009 period.
Sloss
Sloss' net sales and revenues were $21.9 million for the three months ended
March 31, 2009, a decrease of $29.0 million compared to the same period in 2008
reflecting decreased customer demand in the increasingly soft steel market. The
decrease in demand resulted in a 56.5% decrease in metallurgical coke sales
volumes and a 20.7% decrease in metallurgical coke selling price as shown below:
Three months ended
March 31,
2009 2008
Metallurgical coke average selling price per ton $ 308.26 $ 388.51
Metallurgical coke tons sold 45,200 104,024
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Sloss' operating income was $1.6 million for the three months ended March 31, 2009 compared to $18.7 million in the same period in 2008, a decrease of $17.1 million, primarily as a result of decreased revenues on a relatively fixed cost structure as well as increased raw material costs.
Net sales and revenues were $49.2 million for the three months ended March 31, 2009, a decrease of $2.9 million from the same period in 2008 primarily due to lower payment income as a result of a lower loan portfolio balance. Financing had operating income of $12.2 million in the three months ended March 31, 2009, an increase of $18.9 million from the same period in 2008. The increase in operating income was primarily due to the recognition of $17.0 million loss on interest rate swaps in the first quarter of 2008, which was not repeated in the first quarter of 2009. In addition, operating income reflects a $5.2 million decrease in interest expense resulting from a reduction in the weighted average borrowings outstanding for the three months ended March 31, 2009 as compared to the same period in 2008 primarily due to the pay-off and termination of the warehouse facilities totaling $214.0 million in April 2008.
Delinquencies (the percentage of amounts outstanding over 30 days past due) were 4.6% at March 31, 2009 compared to 5.4% at December 31, 2008 and 3.6% at March 31, 2008. The calculation of delinquencies excludes from delinquent amounts those accounts that are in bankruptcy proceedings that are paying their mortgage payments in contractual compliance with bankruptcy court approved mortgage payment obligations.
Homebuilding
Net sales and revenues were $11.0 million for the three months ended
March 31, 2009, a decrease of $29.1 million from the same period in 2008
primarily as a result of a 83.9% decrease in unit completions resulting from the
wind down of this business, offset in part by an increase in the average selling
price per homes shown below:
Three months ended
March 31,
2009 2008
Unit completions 71 442
Average revenue per home sold(1) $ 120,400 $ 89,800
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º (1)
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Homebuilding's operating loss was $2.6 million for the three months ended March 31, 2009 compared to an operating loss of $14.7 million for the same period in 2008. The $12.1 million improvement in operating results was primarily due to favorable selling, general & administrative expense reductions as a result of branch closings and employee reductions in 2008 and 2009 and a $2.4 million gain on the sale of land in the first quarter of 2009. As previously discussed in Note 2 of the "Notes to Condensed Consolidated Financial Statements," the Company decided to close Homebuilding. Therefore, results in the remainder of 2009 will reflect the build-out of the homes in backlog, other costs to close the business and gains or losses on the liquidation of property. These results are not expected to be material to the operating results or financial condition of the Company.
FINANCIAL CONDITION
Cash and cash equivalents of continuing operations decreased by $24.7 million from $117.7 million at December 31, 2008 to $93.0 million at March 31, 2009 reflecting $84.8 million in cash flows provided by continuing operating activities, $29.2 million of cash flows used in investing activities and $78.1 million of cash flows used in financing activities. See additional discussion in the Statement of Cash Flows section that follows.
Net instalment notes receivable were $1,734.9 million at March 31, 2009, down $34.8 million from December 31, 2008 as a result of payments received on outstanding notes exceeding new loan originations. The reduction in new loan originations is the result of the closure and wind down of Homebuilding.
Net receivables were $190.4 million at March 31, 2009, an increase of $13.8 million from December 31, 2008 primarily attributable to increased revenues in the Underground Mining segment in addition to receivables from the sale of Homebuilding assets and used mining equipment in our Surface Mining segment, offset in part by a reduction in receivables from Sloss as a result of decreased revenues.
Inventories were $158.3 million at March 31, 2009, an increase of $25.2 million from December 31, 2008 primarily due to increased inventories at Underground Mining and Sloss, as well as an increase in repossessed property at Financing. The increase at Underground Mining results from increased production and production costs in the first quarter of 2009, as compared to the fourth quarter of 2008. The increase at Sloss was mostly due to a decrease in metallurgical coke demand resulting from the downturn in the steel market, thereby resulting in increased coke inventory on hand. These increases were partially offset by a reduction of goods in process at Homebuilding as a result of a decrease in the number of homes under construction as this business winds down.
Deferred income taxes were $182.4 million at March 31, 2009, down $24.3 million from December 31, 2008 primarily due to the partial utilization of a net operating loss carryforward generated in 2008 from the deemed liquidation of the Homebuilding business for tax purposes.
Accounts payable was $63.5 million at March 31, 2009, down $9.3 million from December 31, 2008 primarily due to decreased demurrage and freight costs in the Underground Mining segment and decreased raw material coal purchases at Sloss.
Accrued expenses were $66.7 million at March 31, 2009, down $24.5 million from December 31, 2008 primarily due to the payment of employee bonuses and other payroll related expenses in the first quarter of 2009 that were accrued as of December 31, 2008.
Mortgage-backed/asset-backed notes were $1,345.2 million at March 31, 2009, down $27.7 million from December 31, 2008 as a result of debt principal payments.
. . .
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