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Walter Industries Inc. Reports Operating Results (10-Q)

August 06, 2010 | About:
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Walter Industries Inc. (WLT) filed Quarterly Report for the period ended 2010-06-30.

Walter Industries Inc. has a market cap of $4.06 billion; its shares were traded at around $75.72 with a P/E ratio of 18.9 and P/S ratio of 4.2. The dividend yield of Walter Industries Inc. stocks is 0.7%. Walter Industries Inc. had an annual average earning growth of 1.7% over the past 10 years.WLT is in the portfolios of John Keeley of Keeley Fund Management, Steve Mandel of Lone Pine Capital, Stanley Druckenmiller of Duquesne Capital Management, LLC, Jim Simons of Renaissance Technologies LLC, Jeremy Grantham of GMO LLC, Steven Cohen of SAC Capital Advisors, Jean-Marie Eveillard of First Eagle Investment Management, LLC.

Highlight of Business Operations:

Our income from continuing operations for the three months ended June 30, 2010 was $116.1 million, or $2.16 per diluted share, which compares to $11.3 million, or $0.21 per diluted share, for the three months ended June 30, 2009. In the three months ended June 30, 2010, net sales and revenues increased $241.5 million and operating income increased $148.8 million versus the same period in 2009. Revenue and operating income improvements in the second quarter were primarily due to higher coking coal pricing and volumes.

Our sales volume expectation for the third quarter ranges from 1.8 million to 2.0 million tons and our forecasted third quarter operating income per ton ranges from $110.00 to $115.00. Third quarter ranges reflect strong pricing and lower expected production costs. For the full year, we have modified our sales volume guidance from 8.0 million tons to a range of 7.7 million to 7.9 million tons. Continuous miner shortfalls in the second quarter resulted in approximately 100,000 tons of reduced production. Slower advance rates on units developing the replacement longwall in Mine No. 7 East are expected to delay the longwall move, resulting in a 100,000 ton reduction in expected fourth quarter production. Coking coal production totaled 1.7 million tons in the second quarter of 2010, as compared to 1.3 million tons during the second quarter of 2009. Production costs averaged $59.82 per ton for the quarter ended June 30, 2010 as compared to $69.38 for the second quarter of 2009, a decrease of $9.56 primarily as a result of higher production volumes. Production volumes are expected to total 1.9 million to 2.1 million tons in the third quarter of 2010 and production costs are expected to decrease to approximately $50.00 to $55.00 per ton in the third quarter of 2010 due to the increased volumes. We continue to work on a plan to acquire and develop approximately 170.0 million tons of Blue Creek Coal reserves to the northwest of our existing mines, which would more than double our coking coal reserve base. These additional reserves include the 52.0 million tons of Chevron Mining, Inc. coal discussed below as well as a coal lease for 22.0 million tons signed with an unrelated third party in July 2010. In April 2010, we signed a non-binding letter of intent to lease mineral rights associated with 52.0 million tons of Blue Creek Coal reserves and to acquire the North River steam coal mine from Chevron Mining, Inc., a subsidiary of Chevron Corporation. The Blue Creek reserves are high-quality, high-vol coking coal and, if the transaction is consummated, allows us to blend this coal with coal from our No. 7 Mine to make a hard coking coal product similar to that from our No. 4 Mine. The non-binding letter of intent also included the acquisition of the existing North River steam coal mine in Fayette County and Tuscaloosa County, AL, which has approximately 11.0 million tons of reserves remaining with expected annual production of 2.5 million to 3.0 million tonsall of which is under contract. Due diligence of this transaction continues into the third quarter of 2010. On May 28, 2010, we acquired HighMount Exploration & Production Alabama, LLC ("HighMount") for a cash payment of approximately $210.0 million. The acquisition of HighMount's Alabama coal bed methane operations includes approximately 1,300 existing conventional gas wells, pipeline infrastructure and related equipment located adjacent to our existing underground mining and coal bed methane business in Alabama. Current proven reserves are approximately 190 bcf (billion cubic feet), with annual coal bed methane production of approximately 8.5 bcf expected. The acquired business is expected to be a stable generator of earnings and cash flow. More importantly, the acquisition of HighMount's gas operations helps ensure that future coal production areas will be properly degasified, thereby improving safety and operating efficiency our existing underground coking coal production. The coal bed methane business sold 2.3 billion cubic feet of natural gas at an average hedged price of $4.45 per thousand cubic feet in the second quarter of 2010 versus 1.6 billion cubic feet at an average hedged price of $3.45 per thousand cubic feet in the second quarter of 2009. Results for the quarter include one month's production and sales from the recently acquired HighMount natural gas operation. We will continue to evaluate expansion opportunities, potential acquisitions and further investments in coal and natural gas. 20

During the second quarter of 2010, the surface mining operations produced 369,000 tons of steam and industrial coal and sold 387,000 tons, as compared to 374,000 tons produced and 277,000 tons sold during the second quarter of 2009. Increased sales volume primarily resulted from increased demand. Operating income in the second quarter of 2010 was $3.3 million, compared to $5.3 million in the second quarter of 2009. The decrease in operating income was primarily attributable to $3.8 million in repair work on the dragline at Taft's Choctaw mine which was completed during the second quarter of 2010. In the third quarter of 2010, we expect to sell between 398,000 and 409,000 tons resulting in operating income of between $16.00 to $20.00 per ton. Third quarter coal sales and margins are expected to be higher due to incremental volumes from the Reid School metallurgical coal mine which opened during the second quarter of 2010. This mine is expected to produce approximately 120,000 tons of high-vol coking coal in the second half of 2010. Walter Coke

Walter Coke sold 96,092 tons of metallurgical coke during the second quarter of 2010 and reported net sales and revenues of $45.0 million and operating income of $13.1 million versus net sales and revenues of $18.7 million and an operating loss of a $2.7 million in the prior year. Revenues and operating income improved primarily on strong metallurgical coke pricing and sales volumes over the prior-year period. Third quarter 2010 metallurgical coke sales are expected to be between 95,000 to 97,000 tons. Lower coke pricing as well as higher coal input and other costs are expected to result in a reduced forecasted operating income per ton of $65.00 to $85.00 in the third quarter of 2010. Summary of Second Quarter Consolidated Results of Continuing Operations

Net sales and revenues for the three months ended June 30, 2010 were $410.6 million, an increase of $241.5 million from $169.1 million in the same period in 2009. The increase in revenues was primarily due to higher average selling prices and higher volumes for coking coal from our Underground Mining segment. Additionally, our Walter Coke and Surface Mining segments experienced increased revenues based on higher volumes and higher average selling prices for their products.

Cost of sales, exclusive of depreciation, increased $78.7 million to $184.1 million, a 74.7% increase from $105.3 million in the second quarter of 2009 and is primarily the result of increased volumes in all of our operating segments as well as increased royalty and inventory costs in our Underground Mining segment. Cost of sales represented 45.4% of net sales for the three months ended June 30, 2010 versus 63.1% of net sales for the same period in 2009. This reduction of cost of sales as a percentage of sales is primarily the result of increased selling prices.

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