Walter Energy Inc. (WLT) reported fourth quarter 2011 pro forma earnings of $1.34 per share, down 22.1% from $1.72 per share earned a year ago. The earnings were below the Zacks Consensus Estimate of $1.63 per share.
Walter Energy’s fiscal 2011 pro forma earnings were $5.76 per share compared with $7.18 per share reported in 2010, and reflect the issuance of additional shares related to the acquisition of Western Coal Corp. The earnings fell short of the Zacks Consensus Estimate of $7.02.
Operating Results
Walter Energy’s total revenue of $699.5 million in the fourth quarter increased 74.5% from $400.8 million in the year-ago quarter. The quarterly revenue fell short of the Zacks Consensus Estimate of $742 million. Fourth quarter revenue comprised $489.3 million from the US segment, $209.8 million from the Canada and UK segment, and $493 million from the Other segment.
In 2011, the company reported total revenue of $2,571.4 million, up 61.9% year over year from $1,587.7 million in 2010. This was primarily driven by the Western Coal acquisition, global diversification, expansion of the mining assets portfolio and favorable pricing for Hard Coking Coal (“HCC”).
These were partially offset by a decline in sales of low-volatility (low-vol) pulverized coal injection (“PCI”). The fiscal 2011 revenue was below the Zacks Consensus Estimate of $2,641 million.
Quarter in Detail
During the quarter, Walter Energy’s metallurgical (met) coal sales were 2,401 thousand metric tons, while total met coal production was 2,407 thousand metric tons. Fourth quarter met coal production consisted of 1,840 thousand metric tons of HCC and 567 thousand metric tons of low-vol PCI. The company also produced 993 thousand metric tons of thermal coal during the fourth quarter 2011.
The consolidated average cash cost per ton was $131.74 for HCC, $165.44 for low-vol PCI, and $69.40 for thermal coal. In the fourth quarter of 2010, the average cash cost per ton of HCC was $91.94, while that of thermal coal was $75.09. Year-ago comparison for low-vol PCI is unavailable as this product was added to the company’s portfolio in second quarter 2011.
On a consolidated basis, cash margins per metric ton were $112 in the fourth quarter for HCC and $47 per metric ton for PCI.
Fourth quarter operating profits at Walter Energy totaled $136.5 million, a dip of 5.5% from the year-ago quarter. The dip was the result of higher production costs per ton of HCC, partially offset by lower production costs per ton of thermal coal.
On a segmental basis, the company recorded an operating income of $145.4 million from the US, $5.7 million from the Canada and UK segment, and suffered an operating loss of $14.6 million from the Other segment.
EBITDA for the quarter was $207 million, up 21.2% from the fourth quarter 2010.
Financial Update
As of December 31, 2011, Walter Energy had a liquidity of $422 million, including $128 million in cash and cash equivalents, and $294 million under its credit facility. The company had a long-term debt of $2,269 million at the quarter-end.
In the fourth quarter, the company reported nearly $121.2 million in capital expenditure, an increase of $44 million from last year. The increase in spending mainly stemmed from expansion of the Canadian and UK operations, which incurred expenses of about $97.6 million; the Other segment expenses amounted to $97 million and nearly $23.5 million was spent on US operations.
Guidance
For the fiscal 2012, Walter Energy expects 11.5 -13.0 million metric tons of met coal sales, comprising approximately 75% HCC and 25% PCI. The guidance is driven by higher production from Mine No. 7 and the completion of the mineral lease agreement with Chevron Mining for Blue Creek coking coal reserves.
Our View
Despite achieving strong revenue growth with acquisition of Western Coal, Walter Energy failed to beat our quarterly as well as fiscal 2011 earnings estimates. This was attributable to higher cost of sales, and increase in capital expenditure and depreciation and depletion expenses in Canadian and UK operations.
We expect that the company will take positive measures to cut down the rising cost of production of HCC. This will help the company to add value to its shareholders.
Peer Update
Walter Energy’s peer Arch Coal, Inc. (ACI) reported pro forma earnings of 29 cents per share for the fourth quarter of 2011, down 12.1% from 33 cents earned a year ago. The earnings were below the Zacks Consensus Estimate of 31 cents per share.
Arch’s total revenue of $1,228.8 million in the fourth quarter missed the Zacks Consensus Estimate of $1,311.0 million. The quarterly revenue improved from the year-ago figure of $835.4 million, reflecting higher sales prices and the acquisition of International Coal Group.
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 holds a Zacks #5 Rank (short-term Strong Sell rating).
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