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TABLE OF CONTENTS
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
ý |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
|
For the quarterly period ended March 31, 2013 |
||
or |
||
o |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
|
For the transition period from to |
Commission File Number 001-13711
WALTER ENERGY, INC.
(Exact name of registrant as specified in its charter)
Delaware (State or other jurisdiction of incorporation or organization) |
13-3429953 (I.R.S Employer Identification No.) |
|
3000 Riverchase Galleria, Suite 1700 Birmingham, Alabama (Address of principal executive offices) |
35244 (Zip Code) |
(205) 745-2000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer ý | Accelerated filer o | Non-accelerated filer o (Do not check if a smaller reporting company) |
Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý
Number of shares of common stock outstanding as of April 30, 2013: 62,571,619
WALTER ENERGY, INC. AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
WALTER ENERGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
|
March 31, 2013 |
December 31, 2012 |
|||||
---|---|---|---|---|---|---|---|
ASSETS |
|||||||
Cash and cash equivalents |
$ | 235,791 | $ | 116,601 | |||
Receivables, net |
315,296 | 256,967 | |||||
Inventories |
302,293 | 306,018 | |||||
Deferred income taxes |
55,629 | 58,526 | |||||
Prepaid expenses |
47,441 | 53,776 | |||||
Other current assets |
23,285 | 23,928 | |||||
Total current assets |
979,735 | 815,816 | |||||
Mineral interests, net of accumulated depletion of $199.4 million and $179.6 million, respectively |
2,927,591 | 2,965,557 | |||||
Property, plant and equipment, net of accumulated depreciation of $845.2 million and $796.7 million, respectively |
1,691,637 | 1,732,131 | |||||
Deferred income taxes |
185,387 | 160,422 | |||||
Other long-term assets |
99,092 | 94,494 | |||||
|
$ | 5,883,442 | $ | 5,768,420 | |||
LIABILITIES AND STOCKHOLDERS' EQUITY |
|||||||
Current debt |
$ | 17,398 | $ | 18,793 | |||
Accounts payable |
133,040 | 114,913 | |||||
Accrued expenses |
192,913 | 184,875 | |||||
Accumulated postretirement benefits obligation |
29,637 | 29,200 | |||||
Other current liabilities |
207,328 | 206,473 | |||||
Total current liabilities |
580,316 | 554,254 | |||||
Long-term debt |
2,593,584 | 2,397,372 | |||||
Deferred income taxes |
883,659 | 921,687 | |||||
Accumulated postretirement benefits obligation |
636,129 | 633,264 | |||||
Other long-term liabilities |
244,084 | 251,272 | |||||
Total liabilities |
4,937,772 | 4,757,849 | |||||
Commitments and contingencies (Note 8) |
|||||||
Stockholders' equity: |
|||||||
Common stock, $0.01 par value per share: |
|||||||
Authorized200,000,000 shares, |
|||||||
Issued62,563,004 and 62,521,300 shares, respectively |
626 | 625 | |||||
Capital in excess of par value |
1,615,407 | 1,628,244 | |||||
Accumulated deficit |
(389,313 | ) | (347,448 | ) | |||
Accumulated other comprehensive income (loss): |
|||||||
Pension and other postretirement benefit plans, net of tax |
(261,383 | ) | (266,042 | ) | |||
Foreign currency translation adjustment |
(17,127 | ) | (1,502 | ) | |||
Unrealized loss on hedges, net of tax |
(3,481 | ) | (4,203 | ) | |||
Unrealized investment gain, net of tax |
941 | 897 | |||||
Total stockholders' equity |
945,670 | 1,010,571 | |||||
|
$ | 5,883,442 | $ | 5,768,420 | |||
The accompanying notes are an integral part of these condensed consolidated financial statements.
1
WALTER ENERGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
|
For the three months ended March 31, |
||||||
---|---|---|---|---|---|---|---|
|
2013 | 2012 | |||||
Revenues: |
|||||||
Sales |
$ | 489,609 | $ | 627,298 | |||
Miscellaneous income |
1,734 | 4,265 | |||||
|
491,343 | 631,563 | |||||
Costs and expenses: |
|||||||
Cost of sales (exclusive of depreciation and depletion) |
420,934 | 431,534 | |||||
Depreciation and depletion |
81,190 | 66,493 | |||||
Selling, general and administrative |
30,674 | 36,247 | |||||
Postretirement benefits |
14,725 | 13,213 | |||||
Restructuring charges |
7,440 | | |||||
|
554,963 | 547,487 | |||||
Operating income (loss) |
(63,620 | ) | 84,076 | ||||
Interest expense |
(52,618 | ) | (28,067 | ) | |||
Interest income |
650 | 277 | |||||
Other income (loss) |
105 | (6,993 | ) | ||||
Income (loss) before income tax expense |
(115,483 | ) | 49,293 | ||||
Income tax expense (benefit) |
(66,039 | ) | 8,677 | ||||
Net income (loss) |
$ | (49,444 | ) | $ | 40,616 | ||
Net income (loss) per share: |
|||||||
Basic |
$ | (0.79 | ) | $ | 0.65 | ||
Diluted |
$ | (0.79 | ) | $ | 0.65 | ||
Dividends per share |
$ | 0.125 | $ | 0.125 | |||
The accompanying notes are an integral part of these condensed consolidated financial statements.
2
WALTER ENERGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
(IN THOUSANDS)
|
For the three months ended March 31, |
||||||
---|---|---|---|---|---|---|---|
|
2013 | 2012 | |||||
Net income (loss) |
$ | (49,444 | ) | $ | 40,616 | ||
Other comprehensive income (loss), net of tax: |
|||||||
Change in pension and postretirement benefit plans, (net of tax expense: $2,882 and $2,422, respectively) |
4,659 | 3,898 | |||||
Change in unrealized gain (loss) on hedges, (net of tax expense (benefit): $343 and $(807), respectively) |
722 | (1,283 | ) | ||||
Change in foreign currency translation adjustment |
(15,625 | ) | 2,419 | ||||
Change in unrealized gain (loss) on investments |
44 | (369 | ) | ||||
Total other comprehensive income (loss), net of tax |
(10,200 | ) | 4,665 | ||||
Total comprehensive income (loss) |
$ | (59,644 | ) | $ | 45,281 | ||
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
WALTER ENERGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES
IN STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2013 (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
|
Total | Common Stock |
Capital in Excess of Par Value |
Accumulated Deficit |
Accumulated Other Comprehensive Loss |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Balance at December 31, 2012 |
$ | 1,010,571 | $ | 625 | $ | 1,628,244 | $ | (347,448 | ) | $ | (270,850 | ) | ||||
Net loss |
(49,444 | ) | (49,444 | ) | ||||||||||||
Other comprehensive loss, net of tax |
(10,200 | ) | (10,200 | ) | ||||||||||||
Stock issued upon the exercise of stock options |
279 | 1 | 278 | |||||||||||||
Dividends paid, $0.125 per share(1) |
(7,816 | ) | (15,630 | ) | 7,814 | |||||||||||
Stock based compensation |
2,887 | 2,887 | ||||||||||||||
Excess tax deficit from stock-based compensation arrangements |
(372 | ) | (372 | ) | ||||||||||||
Other |
(235 | ) | (235 | ) | ||||||||||||
Balance at March 31, 2013 |
$ | 945,670 | $ | 626 | $ | 1,615,407 | $ | (389,313 | ) | $ | (281,050 | ) | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
WALTER ENERGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
|
For the three months ended March 31, |
||||||
---|---|---|---|---|---|---|---|
|
2013 | 2012 | |||||
OPERATING ACTIVITIES |
|||||||
Net income (loss) |
$ | (49,444 | ) | $ | 40,616 | ||
Adjustments to reconcile net income (loss) to net cash flows provided by (used in) operating activities: |
|||||||
Depreciation and depletion |
81,190 | 66,493 | |||||
Deferred income tax benefit |
(61,941 | ) | (10,894 | ) | |||
Amortization of debt issuance costs |
9,982 | 3,644 | |||||
Other |
14,922 | 8,756 | |||||
Decrease (increase) in current assets: |
|||||||
Receivables |
(58,494 | ) | 16,889 | ||||
Inventories |
5,428 | (63,192 | ) | ||||
Prepaid expenses and other current assets |
6,502 | 5,462 | |||||
Increase (decrease) in current liabilities: |
|||||||
Accounts payable |
22,534 | 37,604 | |||||
Accrued expenses and other current liabilities |
9,923 | (34,524 | ) | ||||
Cash flows provided by (used in) operating activities |
(19,398 | ) | 70,854 | ||||
INVESTING ACTIVITIES |
|||||||
Additions to property, plant and equipment |
(34,027 | ) | (120,845 | ) | |||
Proceeds from sales of investments |
| 12,228 | |||||
Other |
1,021 | (85 | ) | ||||
Cash flows used in investing activities |
(33,006 | ) | (108,702 | ) | |||
FINANCING ACTIVITIES |
|||||||
Proceeds from issuance of debt |
450,000 | | |||||
Borrowings under revolving credit agreement |
320,778 | 135,294 | |||||
Repayments on revolving credit agreement |
(320,778 | ) | (70,156 | ) | |||
Retirements of debt |
(254,687 | ) | (9,177 | ) | |||
Dividends paid |
(7,816 | ) | (7,806 | ) | |||
Debt issuance costs |
(15,163 | ) | | ||||
Other |
(328 | ) | (624 | ) | |||
Cash flows provided by financing activities |
172,006 | 47,531 | |||||
Effect of foreign exchange rates on cash |
(412 | ) | 87 | ||||
Net increase in cash and cash equivalents |
$ | 119,190 | $ | 9,770 | |||
Cash and cash equivalents at beginning of period |
$ | 116,601 | $ | 128,430 | |||
Cash and cash equivalents at end of period |
$ | 235,791 | $ | 138,200 | |||
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
WALTER ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2013 (Unaudited)
Note 1Basis of Presentation
Walter Energy, Inc., together with its consolidated subsidiaries (the "Company"), is a leading producer and exporter of metallurgical coal for the global steel industry from underground and surface mines located in the United States, Canada and the United Kingdom. The Company also extracts, processes, markets and/or possesses mineral reserves for thermal coal and anthracite coal, as well as produces metallurgical coke and coal bed methane gas.
The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP") for interim financial information and with the instructions of Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2013 are not necessarily indicative of the results that may be expected for the year ending December 31, 2013. These financial statements should be read in conjunction with the audited financial statements and related notes as of and for the year ended December 31, 2012 included in the Company's Annual Report filed on Form 10-K with the U.S. Securities and Exchange Commission. The balance sheet at December 31, 2012 has been derived from the audited consolidated financial statements for the year ended December 31, 2012 included in the Company's 2012 Annual Report on Form 10-K.
During the first quarter of 2013, the Company determined that the cash dividend declared and paid in the fourth quarter of 2012 should have been reported as a reduction to the capital in excess of par value component of stockholders' equity rather than retained earnings as the Company was in an accumulated deficit position. The change of $7.8 million was included in the current period results by reclassifying the amount from accumulated deficit to capital in excess of par value. Management has determined that the effect of this classification change was immaterial to prior reporting periods affected. The change has no effect on total stockholders' equity.
During the first quarter of 2013, the Company determined to classify certain indirect administrative costs as cost of sales as opposed to selling, general and administrative costs as these costs are supportive of operations. The Company has reported such costs in cost of sales beginning in the first quarter of 2013. If the current year classification of these costs had been retrospectively applied, selling, general and administrative expenses would have been $5.8 million less in the first quarter of 2012 and cost of sales would have increased by a similar amount. Prior period balances have not been restated as management has determined that the effect of this classification change was immaterial to prior reporting periods. The change in classification has no effect on net income.
Adoption of New Accounting Standards
Comprehensive IncomePresentation. On January 1, 2013, the Company adopted Financial Accounting Standards Board ("FASB") Accounting Standards Update ("ASU") 2013-02 which requires disclosure of amounts reclassified out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under GAAP to be reclassified in its entirety to net income, either on the face of the Condensed Consolidated Statements of Operations or in the notes to the financial statements. For other amounts that are not required under GAAP to be reclassified in their entirety to net income in the same reporting period, cross references to other
6
WALTER ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
THREE MONTHS ENDED MARCH 31, 2013 (Unaudited)
Note 1Basis of Presentation (Continued)
disclosures required under GAAP that provide additional detail about the amounts must be provided. The Company has elected disclosure in the Notes to Condensed Consolidated Financial Statements as described in Note 10.
Note 2Restructuring
In response to the current depressed price environment for metallurgical coal, the Company decided in the first quarter of 2013 to curtail production at the Willow Creek mine in the Canadian and U.K. Operations segment. This curtailment will result in a workforce reduction of approximately 250 employees. The Company also plans to close the North River mine in 2013 approximately nine months earlier than the previously expected end of mine life of 2014.
In connection with the curtailment of operations at the Willow Creek mine, the Company recognized a restructuring charge of approximately $7.4 million consisting of severance charges of approximately $4.4 million and contract termination costs of $3.0 million. The majority of the employee termination costs are expected to be paid during the second quarter of 2013. These charges are presented under restructuring charges in the Condensed Consolidated Statements of Operations.
Note 3Inventories
Inventories are summarized as follows (in thousands):
|
March 31, 2013 |
December 31, 2012 |
|||||
---|---|---|---|---|---|---|---|
Coal |
$ | 217,557 | $ | 228,910 | |||
Raw materials and supplies |
84,736 | 77,108 | |||||
Total inventories |
$ | 302,293 | $ | 306,018 | |||
Note 4Income Taxes
The Company estimates its annual effective tax rate based on projected financial income for the full year at the end of each interim reporting period unless projected financial income for the full year is close to break-even, in which case the annual effective tax rate could become volatile and could distort the income tax provision for an interim period. When this happens, the Company calculates the interim income tax provision using actual year-to-date financial results for certain jurisdictions. This method results in an income tax provision based solely on the year-to-date financial taxable income or loss for those jurisdictions. In both cases, the tax effect of unusual or infrequently occurring items, including effects of changes in tax laws or rates, are reported in the interim period in which they occur.
For the three months ended March 31, 2013, the Company determined the current period income tax benefit for the Alabama operations using the actual year-to-date financial results as compared to the estimated annual effective tax rate method utilized in 2012. The year-to-date tax benefit for the Canada, U.K. and West Virginia operations was determined using the estimated annual effective tax rate method.
7
WALTER ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
THREE MONTHS ENDED MARCH 31, 2013 (Unaudited)
Note 4Income Taxes (Continued)
The Company recognized an income tax benefit of $66.0 million for the three months ended March 31, 2013, compared to an income tax provision of $8.7 million for the three months ended March 31, 2012 as the Company incurred a pretax operating loss for the three months ended March 31, 2013 compared to pretax operating income for the same period in 2012. The 2013 and 2012 tax rates reflect the benefit of our Canadian and U.K. operations which are taxed at statutory rates lower than the U.S. rate and the effects of tax losses in excess of losses related to foreign financing activities. The effective tax rates also reflect statutory depletion deductions in the Alabama mining operations.
Note 5Debt
Debt consisted of the following (in thousands):
|
March 31, 2013 |
December 31, 2012 |
Weighted Average Stated Interest Rate At March 31, 2013 |
Final Maturity |
||||||
---|---|---|---|---|---|---|---|---|---|---|
2011 term loan A |
$ | 656,566 | $ | 756,974 | 4.80% | 2016 | ||||
2011 term loan B |
978,178 | 1,127,770 | 5.75% | 2018 | ||||||
Revolving credit facility |
| | N/A | 2016 | ||||||
9.875% senior notes ($500.0 million face value) |
496,582 | 496,510 | 9.88% | 2020 | ||||||
8.500% senior notes |
450,000 | | 8.50% | 2021 | ||||||
Other(1) |
29,656 | 34,911 | Various | Various | ||||||
Total debt |
2,610,982 | 2,416,165 | ||||||||
Less: current debt(1) |
(17,398 | ) | (18,793 | ) | ||||||
Total long-term debt |
$ | 2,593,584 | $ | 2,397,372 | ||||||
Credit Agreement Amendment
On March 22, 2013, the Company entered into an amendment (the "Fourth Amendment") to the 2011 Credit Agreement dated as of April 1, 2011, as amended by the First Amendment to Credit Agreement, dated as of January 20, 2012, as further amended by the Second Amendment to Credit Agreement, dated as of August 16, 2012, and as further amended by the Third Amendment to Credit Agreement dated as of October 29, 2012, among the Company, the various lenders, Morgan Stanley Senior Funding, Inc. as administrative agent, and other agents named therein. The Fourth Amendment amended a financial covenant in the 2011 Credit Agreement to provide additional flexibility for the issuance of senior unsecured notes, subject to the lessor of 100% and $250.0 million, in each case, of the net proceeds of such notes issuance being used to repay term loans outstanding under the 2011 Credit Agreement. The Fourth Amendment also provided that, should a repricing event occur within six months of the effective date of the Fourth Amendment, the Company must pay a fee equal to 1.0% of the aggregate principal amount of, as applicable, (i) the portion of the Term Loan B balance prepaid in connection with such repricing event or (ii) the portion of the Term Loan B balance outstanding on such date that is subject to an effective pricing reduction pursuant to such repricing event.
8
WALTER ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
THREE MONTHS ENDED MARCH 31, 2013 (Unaudited)
Note 5Debt (Continued)
8.50% Senior Notes
On March 27, 2013, the Company issued $450.0 million of 8.5% senior notes due April 15, 2021 (the "2021 Notes"). These Notes are unconditionally guaranteed, jointly and severally, on an unsecured basis, by each of our current and future wholly-owned U.S. domestic restricted subsidiaries. Interest on the 2021 Notes accrues at the rate of 8.5% per year and is payable semi-annually in arrears on April 15 and October 15, commencing on October 15, 2013. At any time prior to April 15, 2016, the Company may redeem up to 35% of the aggregate principal amount of the 2021 Notes at a redemption price of 108.5% of the principal amount, plus accrued and unpaid interest. The Company may redeem the 2021 Notes, in whole or in part, after April 15, 2016 and prior to April 15, 2017, at a redemption price equal to 100% of the aggregate principal amount of the 2021 Notes plus a "make-whole" premium and accrued and unpaid interest. The Company may redeem the 2021 Notes, in whole or in part at redemption prices equal to 104.25% for the twelve months commencing April 15, 2017, 102.125% for the twelve months commencing April 15, 2018 and 100% beginning on April 15, 2019, in each case plus accrued and unpaid interest.
Upon the occurrence of a change of control repurchase event, unless the Company has exercised its right to redeem the 2021 Notes, the Company will be required to offer to repurchase each holder's 2021 Notes at a price equal to 101% of the aggregate principal amount, plus accrued and unpaid interest.
Note 6Pension and Other Postretirement Benefits
The components of net periodic benefit cost are as follows (in thousands):
|
Pension Benefits | Other Postretirement Benefits |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
For the three months ended March 31, |
For the three months ended March 31, |
|||||||||||
|
2013 | 2012 | 2013 | 2012 | |||||||||
Components of net periodic benefit cost: |
|||||||||||||
Service cost |
$ | 1,766 | $ | 1,498 | $ | 2,486 | $ | 2,018 | |||||
Interest cost |
3,070 | 3,129 | 7,198 | 7,253 | |||||||||
Expected return on plan assets |
(4,235 | ) | (4,031 | ) | | | |||||||
Amortization of prior service cost |
66 | 64 | 307 | 261 | |||||||||
Amortization of net actuarial loss |
2,434 | 2,313 | 4,734 | 3,681 | |||||||||
Net periodic benefit cost |
$ | 3,101 | $ | 2,973 | $ | 14,725 | $ | 13,213 | |||||
9
WALTER ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
THREE MONTHS ENDED MARCH 31, 2013 (Unaudited)
Note 7Net Income (Loss) Per Share
A reconciliation of the basic and diluted net income (loss) per share computations for the three months ended March 31, 2013 and 2012 is as follows (in thousands, except per share data):
|
For the three months ended March 31, | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2013 | 2012 | |||||||||||
|
Basic | Diluted | Basic | Diluted | |||||||||
Numerator: |
|||||||||||||
Net income (loss) |
$ | (49,444 | ) | $ | (49,444 | ) | $ | 40,616 | $ | 40,616 | |||
Denominator: |
|||||||||||||
Average number of common shares outstanding |
62,599 | 62,599 | 62,463 | 62,463 | |||||||||
Effect of dilutive securities: |
|||||||||||||
Stock awards and warrants(1) |
| | | 276 | |||||||||
|
62,599 | 62,599 | 62,463 | 62,739 | |||||||||
Net income (loss) per share |
$ | (0.79 | ) | $ | (0.79 | ) | $ | 0.65 | $ | 0.65 | |||
The table below sets forth the share-based awards that have been exercised or released:
|
For the three months ended March 31, |
||||||
---|---|---|---|---|---|---|---|
|
2013 | 2012 | |||||
Stock options |
24,831 | 19,059 | |||||
Restricted stock units |
16,873 | 17,959 | |||||
Total |
41,704 | 37,018 | |||||
10
WALTER ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
THREE MONTHS ENDED MARCH 31, 2013 (Unaudited)
Note 8Commitments and Contingencies
Income Tax Litigation
On December 27, 1989, the Company and most of its U.S. subsidiaries each filed a voluntary petition for reorganization under Chapter 11 of Title 11 of the United States Code (the "Bankruptcy Proceedings") in the United States Bankruptcy Court for the Middle District of Florida, Tampa Division (the "Bankruptcy Court"). The Company emerged from bankruptcy on March 17, 1995 (the "Effective Date") pursuant to the Amended Joint Plan of Reorganization dated as of December 9, 1994, as modified on March 1, 1995 (as so modified the "Consensual Plan"). Despite the confirmation and effectiveness of the Consensual Plan, the Bankruptcy Court continues to have jurisdiction over, among other things, the resolution of disputed prepetition claims against the Company and other matters that may arise in connection with or related to the Consensual Plan, including claims related to federal income taxes.
In connection with the U.S. Bankruptcy Proceedings, the Internal Revenue Service ("IRS") filed a proof of claim in the Bankruptcy Court (the "Proof of Claim") for a substantial amount of taxes, interest and penalties with respect to fiscal years ended August 31, 1983 through May 31, 1994. The Company filed an adversary proceeding in the Bankruptcy Court disputing the Proof of Claim (the "Adversary Proceeding") and the various issues have been litigated in the Bankruptcy Court. An opinion was issued by the Bankruptcy Court in June 2010 as to the remaining disputed issues. The Bankruptcy Court instructed both parties to submit a final order addressing all issues that have been litigated for the tax years 1983 through 1995 in the Adversary Proceeding by late August 2010. At the request of both parties, the Bankruptcy Court granted an extension of time of 90 days from the initial submission date to submit the final order. Additional extensions of time to submit the proposed final order were granted in November 2010, February 2011, May 2011, September 2011, and January 2013. At the request of both parties, in January 2013 the Bankruptcy Court granted an additional extension of time until May 30, 2013 to submit the final order.
The amounts initially asserted by the Proof of Claim do not reflect the subsequent resolution of various issues through settlements or concessions by the parties. The Company believes that any financial exposure with respect to those issues that have not been resolved or settled in the Proof of Claim is limited to interest and possible penalties and the amount of tax assessed has been offset by tax reductions in future years. All of the issues in the Proof of Claim, which have not been settled or conceded, have been litigated before the Bankruptcy Court and are subject to appeal but only at the conclusion of the entire Adversary Proceeding.
The IRS completed its audit of the Company's federal income tax returns for the years ended May 31, 2000 through December 31, 2005. The IRS issued 30-Day Letters to the Company in June 2010, proposing changes to tax for these tax years. The Company believes its tax filing positions have substantial merit and filed a formal protest with the IRS within the prescribed 30-day time limit for those issues which have not been previously settled or conceded. The IRS filed a rebuttal to the Company's formal protest and the case was assigned to the Appeals Division of the IRS. The Appeals Division convened a hearing on March 8, 2011 and heard arguments from both parties as to issues not settled or conceded for the 2000 through 2005 audit period. As of March 31, 2013, a final resolution has not been reached with the Appeals Division pertaining to these matters. The disputed issues in this audit period are similar to the issues remaining in the Proof of Claim.
11
WALTER ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
THREE MONTHS ENDED MARCH 31, 2013 (Unaudited)
Note 8Commitments and Contingencies (Continued)
In the second quarter of 2012, the IRS completed its audit of the Company's federal income tax returns for the years 2006 through 2008 and has proposed adjustments to tax for these periods. The IRS issued a 30-Day Letter with proposed adjustments and the Company responded to the IRS within the prescribed 30-day time limit. The proposed adjustments are similar to issues in the prior Proof of Claim and included a proposed adjustment to a worthless stock deduction reported in the Company's 2008 federal income tax return. In the third quarter of 2012, the Company received notification from the IRS that the audit of the 2006 through 2008 tax years had been reopened for further review. The IRS issued a revised IRS Appeals Transmittal Letter in April 2013 conceding the proposed adjustment to the worthless stock deduction. The Company has evaluated the remaining proposed adjustments submitted to IRS Appeals and believes the Company's tax filing positions have substantial merit.
The IRS is conducting an audit of the Company's income tax returns filed for 2009 and 2010. Since the examination is ongoing, any resulting tax deficiency or overpayment cannot be estimated at this time. During 2013, the statute of limitations for assessing additional income tax deficiencies will expire for certain tax years in several state tax jurisdictions. The expiration of the statute of limitations for these years is expected to have an immaterial impact on total uncertain income tax positions and net income.
It is reasonably possible that the amount of unrecognized tax benefits will change in the next twelve months. The Company anticipates a final order will be issued by the Bankruptcy Court in 2013 settling the issues in the Proof of Claim. The final order by the Bankruptcy Court would permit a resolution of similar issues for the tax years currently in Appeals (2000-2005) and Exams (2006-2010). As of March 31, 2013, the Company had $38 million of accruals for unrecognized tax benefits on the matters subject to disposition. Due to the uncertainty related to the potential outcome of these matters, at this time the range of reasonably possible changes in unrecognized tax benefits in the next twelve months cannot be estimated.
The Company believes that all of its current and prior tax filing positions have substantial merit and intends to defend vigorously any tax claims asserted. The Company believes that it has sufficient accruals to address any claims, including interest and penalties. Management does not believe that any potential difference between the final settlements and the amounts accrued will have a material effect on the Company's financial position, but such potential difference could be material to results of operations in a future reporting period.
Environmental Matters
The Company is subject to a wide variety of laws and regulations concerning the protection of the environment, both with respect to the construction and operation of its plants, mines and other facilities and with respect to remediating environmental conditions that may exist at its own and other properties.
The Company believes that it is in substantial compliance with federal, state and local environmental laws and regulations. The Company accrues for environmental expenses resulting from existing conditions that relate to past operations when the costs are probable and can be reasonably estimated.
12
WALTER ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
THREE MONTHS ENDED MARCH 31, 2013 (Unaudited)
Note 8Commitments and Contingencies (Continued)
Walter Coke, Inc.
Walter Coke entered into a decree order in 1989 ("the 1989 Order") relative to a Resource Conservation Recovery Act ("RCRA") compliance program mandated by the Environmental Protection Agency ("EPA"). A RCRA Facility Investigation ("RFI") Work Plan was prepared which proposed investigative tasks to assess the presence of contamination at the Walter Coke facility. In 2004, the EPA re-directed Walter Coke's RFI efforts toward completion of the Environmental Indicator ("EI") determinations for the Current Human Exposures, which were approved and finalized for Walter Coke's Birmingham facility in 2005. In 2008, as a follow-up to the EI determination, the EPA requested that Walter Coke perform additional soil sampling and testing in the neighborhoods surrounding its facility. The results of this sampling and testing were submitted to the EPA for review in 2009. In conjunction with the plan, Walter Coke agreed to remediate portions of 23 properties based on the 2009 sampling and that process was completed in 2012.
In 2011, the EPA notified Walter Coke in the form of a General Notice Letter that it proposed that the offsite remediation project be classified and managed as a Superfund site under CERCLA, allowing other Potentially Responsible Parties (PRP's) to potentially be held responsible. Under CERCLA authority, EPA is proceeding directly with the offsite sampling work and deferring any further enforcement actions or decisions, including evaluating whether Walter Coke or any other company is in fact a PRP, to a subsequent time. In February 2013, the Agency for Toxic Substances and Disease Registry (ATSDR) released a draft report concerning past, present and future exposures to residential soils in North Birmingham and concluded that there is no public health hazard. In March 2013, EPA released the North Birmingham Air Toxics Risk Assessment showing the air quality to be acceptable.
A RCRA Section 3008(h) Administrative Order on Consent ("the 2012 Order") with the effective date of September 24, 2012 was signed by Walter Coke and the EPA. The 2012 Order declared that all of the approved investigation tasks of the RFI Work Plans required by the 1989 Order had been completed by Walter Coke and that the 1989 Order was terminated and no longer in effect. The objectives of the 2012 Order are to perform Corrective Measure Studies, implement remedies if necessary, and implement and maintain institutional controls if required at the Walter Coke facility.
The Company has incurred costs to investigate the presence of contamination at the Walter Coke facility and to define remediation actions to address this environmental liability in accordance with the agreements reached with the EPA under the RFI and the residential soil sampling conducted by Walter Coke in the neighborhoods surrounding its facility. At March 31, 2013, the Company has an amount accrued that is probable and can be reasonably estimated for the costs to be incurred to identify and define remediation actions, as well as to perform certain remedial tasks which can be quantified. The amount of this accrual is not material to the Company's consolidated financial statements. While it is probable that the Company will incur additional future costs to remediate environmental liabilities at the Walter Coke facility, the amount of such additional costs cannot be reasonably estimated at this time. Additionally, pending EPA's sampling activities in the neighborhoods and identification of PRP's, the Company at this time is unable to reasonably estimate the cost of offsite remediation activities that may be required. Although no assurances can be given that the Company will not be required in the future to make material expenditures relating to the Walter Coke site or other sites, management does not believe at this time that the cleanup costs, if any, associated with these sites will have a material
13
WALTER ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
THREE MONTHS ENDED MARCH 31, 2013 (Unaudited)
Note 8Commitments and Contingencies (Continued)
adverse effect on the Company's consolidated financial statements, but such cleanup costs could be material to results of operations in a future reporting period.
In 2011, the Company and Walter Coke were named in a suit filed by Louise Moore (Louise Moore v. Walter Energy, Inc. and Walter Coke, Inc., Case No. 2:11-CV-01391) in the federal District Court for the Northern District of Alabama. This is a putative civil class action alleging state law tort claims arising from the alleged presence on properties of substances, including arsenic, BaP, and other hazardous substances, allegedly as a result of current and/or historic operations in the area conducted by the defendants and/or their predecessors. Subsequently, the plaintiff filed an amended complaint eliminating Walter Energy as a defendant and amending the claims alleged against Walter Coke to relate to Walter Coke's alleged conduct for the period commencing after March 2, 1995. Thereafter, Walter Coke filed a Motion to Dismiss the amended complaint. On September 28, 2012, the Court issued a memorandum opinion and order granting in part and denying in part the motion. In partially granting Walter Coke's motion, the Court held that the plaintiff's claim for injunctive relief was not valid and that class action-related claims must be dismissed (with leave to re-plead) due to an improperly defined class. In partially ruling for the plaintiff, the Court held that at the pleading stage the plaintiff's claims could not be dismissed on rule of repose grounds or due to insufficient pleading. The plaintiff filed an amended complaint on October 29, 2012. On November 19, 2012, Walter Coke filed an answer and motion for partial dismissal of plaintiff's second amended complaint. The Court held a hearing on Walter Coke's motion for partial dismissal of the second amended complaint on January 10, 2013 and a ruling is pending.
The Company and Walter Coke believe that there is no merit to the claims alleged in this action and intend to vigorously defend this matter.
Jim Walter Resources
In July, 2011, Jim Walter Resources, Inc. ("JWR") reported a slurry spill at its North River mine to the Alabama Department of Environmental Management ("ADEM") and the Alabama Surface Mining Commission ("ASMC"). As a result, a penalty of $145,200 was assessed and paid to ASMC in November, 2011. A penalty of $60,000 was assessed by ADEM in December 2011. JWR has expended approximately $5.0 million in remediation costs which is substantially complete. Walter Energy brought a related insurance claim that was resolved in March 2013.
Willow Creek
On March 5, 2013, a complaint was received from British Columbia's Environmental Crown Counsel seeking a monetary penalty of $100,000 CAD for alleged violations of the Federal Fisheries Act associated with an April 2011 release of sediment and debris into Willow Creek from the forest service road leading to the Willow Creek mine. To date, we have incurred some costs in taking corrective actions in response to the 2011 release and are continuing to cooperate with regulatory authorities. We intend to negotiate with the authorities in pursuit of a mutually agreeable settlement.
14
WALTER ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
THREE MONTHS ENDED MARCH 31, 2013 (Unaudited)
Note 8Commitments and Contingencies (Continued)
Securities Class Actions and Shareholder Derivative Actions
On January 26, 2012 and March 15, 2012, putative class actions were filed against Walter Energy, Inc. and some of its current and former senior executive officers in the U.S. District Court for the Northern District of Alabama (Rush v. Walter Energy, Inc., et al.). The three executive officers named in the complaints are: Keith Calder, Walter's former CEO; Walter Scheller, the Company's current CEO and a director; and Neil Winkelmann, former President of Walter's Canadian and U.K. Operations (collectively the "Individual Defendants"). The complaints were filed by Peter Rush and Michael Carney, purported shareholders of Walter Energy who each sought to represent a class of Walter Energy shareholders who purchased common stock between April 20, 2011 and September 21, 2011.
These complaints alleged that Walter Energy and the Individual Defendants made false and misleading statements regarding the Company's operations outlook for the second quarter of 2011. The complaints further alleged that the Company and the Individual Defendants knew that these statements were misleading and failed to disclose material facts that were necessary in order to make the statements not misleading. Plaintiffs claimed violations of Section 10(b) of the Securities Exchange Act of 1934, Rule 10b-5 promulgated thereunder, and Section 20(a) of the 1934 Act. On May 30, 2012, the two actions were consolidated into In re Walter Energy, Inc. Securities Litigation. The court also appointed the Government of Bermuda Contributory and Public Service Superannuation Pension Plans as well as the Stephen C. Beaulieu Revocable Trust to be lead plaintiffs and approved lead plaintiffs' selection of Robbins Geller Rudman & Dowd LLP and Kessler Topaz Meltzer & Check, LLP as lead plaintiffs' counsel for the consolidated action. On August 20, 2012, Lead Plaintiffs filed a consolidated amended class action complaint in this action. The consolidated amended complaint names as an additional defendant Joseph Leonard, a current director and former interim CEO of Walter, in addition to the previously named defendants. Defendants filed a Motion to Dismiss the amended complaint on October 4, 2012. On January 29, 2013, the court denied that motion without prejudice. Defendants answered the complaint on February 15, 2013 and on March 5, 2013. The parties are now in the process of discovery.
Walter Energy and the other named defendants believe that there is no merit to the claims alleged and intend to vigorously defend these actions.
On February 7, 2012, a shareholder derivative lawsuit was filed in the 10th Judicial Circuit of Alabama (Israni v. Clark et al.). On February 10, 2012, a second shareholder derivative suit was filed in the same court (Himmel v. Scheller et al.), and on February 16, 2012 a third derivative suit was filed (Walters v. Scheller et al.). All three complaints named as defendants the Company's current Board of Directors, Keith Calder and Neil Winkelmann. The Company was named as a nominal defendant in each complaint. The three complaints alleged similar facts to those alleged in the Rush complaint. The complaints variously asserted state law claims for breaches of fiduciary duties for alleged failures to maintain internal controls and to properly manage the Company, unjust enrichment, waste of corporate assets, gross mismanagement and abuse of control. The three derivative actions sought, among other things, recovery for the Company for damages that the Company suffered as a result of alleged wrongful conduct. On April 11, 2012, the Court consolidated these shareholder derivative suits. Walter Energy thereafter entered into a stipulation with the lead plaintiffs in the consolidated derivative suit, pursuant to which all proceedings in the derivative action were stayed pending the filing of the
15
WALTER ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
THREE MONTHS ENDED MARCH 31, 2013 (Unaudited)
Note 8Commitments and Contingencies (Continued)
consolidated amended complaint in the class action. On September 19, 2012, lead plaintiffs filed a consolidated shareholder derivative complaint. This action has been stayed pending the resolution of summary judgment motions in the putative securities class action. The derivative plaintiffs will have certain rights to participate in discovery taken in the federal securities action.
On March 1, 2012, a shareholder derivative lawsuit was filed in the U.S. District Court for the Northern District of Alabama (Makohin v. Clark, et al.). On September 27, 2012 a second shareholder derivative lawsuit was filed in the same court (Sinerius v. Beatty, et al.) Both complaints name as defendants the Company's current Board of Directors and Keith Calder. The Company is named as a nominal defendant in each complaint. These complaints, like the state court derivative claims, allege similar facts to those alleged in the Rush complaint. The Makohin complaint asserts state law claims for breaches of fiduciary duties and unjust enrichment, while the Sinerius complaint asserts these same claims as well as claims for abuse of control and gross mismanagement. Both actions seek, among other things, recovery for the Company for damages that the Company suffered as a result of alleged wrongful conduct and restitution from defendants of all profits, benefits and other compensation that they wrongfully obtained. Like the state court derivative action, both of these cases have been stayed pending resolution of summary judgment motions in the putative securities class action. The federal derivative plaintiffs will also have certain rights to participate in discovery taken in the federal securities action.
Walter Energy and the other named defendants believe that there is no merit to the claims alleged in these shareholder derivative lawsuits and intend to vigorously defend these actions.
Miscellaneous Litigation
The Company and its subsidiaries are parties to a number of other lawsuits arising in the ordinary course of their businesses. The Company records costs relating to these matters when a loss is probable and the amount can be reasonably estimated. The effect of the outcome of these matters on the Company's future results of operations cannot be predicted with certainty as any such effect depends on future results of operations and the amount and timing of the resolution of such matters. While the results of litigation cannot be predicted with certainty, the Company believes that the final outcome of such other litigation will not have a material adverse effect on the Company's consolidated financial statements.
Commitments and ContingenciesOther
In the opinion of management, accruals associated with contingencies incurred in the normal course of business are sufficient. Resolution of existing known contingencies is not expected to significantly affect the Company's financial position or results of operations.
Note 9Derivative Financial Instruments
Interest Rate Swaps
On June 27, 2011, the Company entered into an interest rate swap agreement with a notional value of $450.0 million. The objective of the swap is to protect against the variability in expected future cash flows attributable to changes in the benchmark interest rate related to interest payments required
16
WALTER ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
THREE MONTHS ENDED MARCH 31, 2013 (Unaudited)
Note 9Derivative Financial Instruments (Continued)
under the 2011 Credit Agreement. The interest rate on the debt is subject to change due to fluctuations in the benchmark interest rate of 3-month LIBOR. The structure of the hedge is a three year amortizing interest rate swap based on a 1.17% fixed rate with quarterly fixed rate and floating rate payment dates beginning on July 18, 2011. The hedge will be settled upon maturity and is being accounted for as a cash flow hedge. Changes in the fair value of the hedge that take place through the date of maturity are reported in accumulated other comprehensive income (loss) and reclassified into earnings in the same period or periods during which the hedged transactions affect earnings.
On December 30, 2008, the Company entered into an interest rate hedge agreement with a notional value of $31.5 million. The objective of the hedge is to protect against the variability in expected future cash flows attributable to changes in the benchmark interest rate related to 62 of the 64 monthly interest payments required under an equipment financing arrangement for a new longwall shield system entered into on October 21, 2008. The interest rate on the debt is subject to change due to fluctuations in the benchmark interest rate of 1-month LIBOR. The structure of the hedge is a 62 month amortizing interest rate swap based on a 1.84% fixed rate with monthly fixed rate and floating rate payment dates beginning on February 1, 2009. The hedge will be settled upon maturity and is being accounted for as a cash flow hedge. Changes in the fair value of the hedge that take place through the date of maturity are reported in accumulated other comprehensive income (loss) and reclassified into earnings in the same period or periods during which the hedged transactions affect earnings.
Interest Rate Cap
On June 27, 2011, the Company entered into an interest rate cap agreement related to interest payments required under the 2011 Credit Agreement with a notional value of $255.0 million. The objective of the cap is to protect against the variability in expected future cash flows attributable to changes in the benchmark interest rate above 2.00%. The interest rate on the debt is subject to change due to fluctuations in the benchmark interest rate of 3-month LIBOR. The structure of the hedge is a three year amortizing interest rate cap based on a strike price of 2.00% with quarterly fixed rate and floating rate payment dates beginning on July 7, 2011. The hedge will be settled upon maturity and is being accounted for as a cash flow hedge. Changes in the fair value of the hedge that take place through the date of maturity are reported in accumulated other comprehensive income (loss) and reclassified into earnings in the same period or periods during which the hedged transactions affect earnings.
Natural Gas Hedge
Revenues derived from the sale of natural gas are subject to volatility based on changes in market prices. In order to reduce the risk associated with natural gas price volatility, on June 7, 2011 the Company entered into a one year swap contract to hedge 4.2 million MMBTUs of natural gas sales beginning in July 2011 and ending June 2012, at a price of $5.00 per MMBTU. The swap agreement hedged approximately 30% of anticipated natural gas sales from July 2011 until June 2012. The hedge was settled upon maturity and was accounted for as a cash flow hedge. The Company did not have any commodity hedges outstanding at March 31, 2013.
17
WALTER ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
THREE MONTHS ENDED MARCH 31, 2013 (Unaudited)
Note 9Derivative Financial Instruments (Continued)
The following table presents the fair values of the Company's derivative instruments as well as their classification within the Condensed Consolidated Balance Sheets (in thousands). See Note 11 for additional information related to the fair values of our derivative instruments.
|
March 31, 2013 |
December 31, 2012 |
|||||
---|---|---|---|---|---|---|---|
Asset derivatives designated as cash flow hedging instruments: |
|||||||
Interest rate cap(1) |
$ | 9 | $ | 12 | |||
Total asset derivatives |
$ | 9 | $ | 12 | |||
Liability derivatives designated as cash flow hedging instruments: |
|||||||
Interest rate swaps(2) |
$ | 5,546 | $ | 6,615 | |||
Total liability derivatives |
$ | 5,546 | $ | 6,615 | |||
The following tables presents the gains and losses from derivative instruments for the three months ended March 31, 2013 and 2012 and their location within the condensed consolidated financial statements (in thousands). The Company utilizes only cash flow hedges that are considered highly effective.
|
Gain (loss) recognized in accumulated other comprehensive income, net of tax |
Gain (loss) reclassified from accumulated other comprehensive income to earnings, net of tax(1)(2) |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Three months ended March 31, |
Three months ended March 31, |
|||||||||||
Derivatives designated as cash flow hedging instruments |
2013 | 2012 | 2013 | 2012 | |||||||||
Natural gas hedges |
$ | | $ | (2,132 | ) | $ | | $ | 1,442 | ||||
Interest rate swaps |
1,340 | 103 | (616 | ) | (565 | ) | |||||||
Interest rate cap |
(2 | ) | (131 | ) | | | |||||||
Total |
$ | 1,338 | $ | (2,160 | ) | $ | (616 | ) | $ | 877 | |||
18
WALTER ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
THREE MONTHS ENDED MARCH 31, 2013 (Unaudited)
Note 10Accumulated Other Comprehensive Income (Loss)
The following table presents the changes in accumulated other comprehensive income (loss) by component for the three months ended March 31, 2013, net of tax (in thousands).
|
Pension and other post-retirement plans |
Unrealized gain/(loss) on hedges |
Foreign currency translation adjustment |
Unrealized gain/(loss) on investments |
Total | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Beginning balance as of December 31, 2012 |
$ | (266,042 | ) | $ | (4,203 | ) | $ | (1,502 | ) | $ | 897 | $ | (270,850 | ) | ||
Other comprehensive income (loss) before reclassifications |
| 1,338 | (15,625 | ) | 48 | (14,239 | ) | |||||||||
Amounts reclassified from accumulated other comprehensive income (loss) |
4,659 | (616 | ) | | (1) | (4 | ) | 4,039 | ||||||||
Net current-period other comprehensive income (loss) |
4,659 | 722 | (15,625 | ) | 44 | (10,200 | ) | |||||||||
Total |
$ | (261,383 | ) | $ | (3,481 | ) | $ | (17,127 | ) | $ | 941 | $ | (281,050 | ) | ||
19
WALTER ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
THREE MONTHS ENDED MARCH 31, 2013 (Unaudited)
Note 10Accumulated Other Comprehensive Income (Loss) (Continued)
The following table presents amounts reclassified out of each component of accumulated other comprehensive income (loss) for the three months ended March 31, 2013 (in thousands).
Details about Accumulated Other Comprehensive Income (Loss) Components |
Amount Reclassified from Accumulated Other Comprehensive Income (Loss) |
Affected Line Item in the Condensed Consolidated Statements of Operations |
|||
---|---|---|---|---|---|
Gains and losses on cash flow hedges |
|||||
Interest rate swaps |
$ | (997 | ) | Interest expense | |
|
(997 | ) | Income (loss) before income tax expense | ||
|
381 | Income tax benefit | |||
|
$ | (616 | ) | Net income (loss) | |
Amortization of pension and postretirement benefit plans |
|||||
Prior service cost |
$ | 373 | (a) | ||
Net actuarial loss |
7,168 | (a) | |||
|
7,541 | Income (loss) before income tax expense | |||
|
(2,882 | ) | Income tax (expense) | ||
|
$ | 4,659 | Net income (loss) | ||
Gains and losses on available-for-sale securities |
$ | (4 | ) | Other income (loss) | |
|
(4 | ) | Income (loss) before income tax expense | ||
|
| Income tax (expense) | |||
|
$ | (4 | ) | Net income (loss) | |
Total reclassifications for the period |
$ | 4,039 | Net income (loss) | ||
Note 11Fair Value of Financial Instruments
Fair value is defined as the price that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A three level hierarchy has been established for valuing assets and liabilities based on how transparent (observable) the inputs are that are used to determine fair value, with the inputs considered most
20
WALTER ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
THREE MONTHS ENDED MARCH 31, 2013 (Unaudited)
Note 11Fair Value of Financial Instruments (Continued)
observable categorized as Level 1 and those that are the least observable categorized as Level 3. Hierarchy levels are defined as follows:
Level 1: |
Quoted prices in active markets for identical assets and liabilities; | |
Level 2: |
Quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar instruments in markets that are not active; and |
|
Level 3: |
Unobservable inputs that are supported by little or no market data which require the reporting entity to develop its own assumptions. |
The following table presents information about the Company's assets and liabilities that are measured at fair value on a recurring basis as of March 31, 2013 and December 31, 2012 and indicate the fair value hierarchy of the valuation techniques utilized to determine such values. For some assets, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. When this is the case, the asset is categorized based on the level of the most significant input to the fair value measurement. The Company's assessment of the significance of a particular input to the fair value measurement requires judgment and considers factors specific to the assets being valued.
|
March 31, 2013 | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Fair Value Measurements Using | |
|||||||||||
|
Total Fair Value |
||||||||||||
(in thousands)
|
Level 1 | Level 2 | Level 3 | ||||||||||
Assets: |
|||||||||||||
Interest rate cap |
$ | | $ | 9 | $ | | $ | 9 | |||||
Liabilities: |
|||||||||||||
Interest rate swaps |
$ | | $ | 5,546 | $ | | $ | 5,546 | |||||
|
December 31, 2012 | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Fair Value Measurements Using | |
|||||||||||
|
Total Fair Value |
||||||||||||
(in thousands)
|
Level 1 | Level 2 | Level 3 | ||||||||||
Assets: |
|||||||||||||
Interest rate cap |
$ | | $ | 12 | $ | | $ | 12 | |||||
Liabilities: |
|||||||||||||
Interest rate swaps |
$ | | $ | 6,615 | $ | | $ | 6,615 | |||||
Below is a summary of the Company's valuation techniques for Level 1 and Level 2 financial assets and liabilities:
Equity securitiesChanges in the fair value of trading securities are recorded in other income (loss) and determined using observable market prices. For the three months ended March 31, 2013, a gain of $109 thousand was recorded related to trading securities held at the reporting date. Realized losses of $4 thousand on the sale of available-for-sale securities were recorded in other income (loss) during the three months ended March 31, 2013 and were determined using the specific identification method.
21
WALTER ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
THREE MONTHS ENDED MARCH 31, 2013 (Unaudited)
Note 11Fair Value of Financial Instruments (Continued)
Interest rate capThe fair value of the interest rate cap was determined using quoted dealer prices for similar contracts in active over-the-counter markets.
Interest rate swapsThe fair value of interest rate swaps were determined using quoted dealer prices for similar contracts in active over-the-counter markets.
The following methods and assumptions were used to estimate the fair value for which the fair value option was not elected:
Cash and cash equivalents, receivables and accounts payableThe carrying amounts reported in the balance sheet approximate fair value.
DebtDebt associated with the Company's 2011 term loan A and term loan B in the amount of $656.6 million and $978.2 million, respectively, at March 31, 2013 and $757.0 million and $1.128 billion, respectively, at December 31, 2012 was carried at cost. There were no borrowings outstanding under the Revolver at March 31, 2013 and December 31, 2012. Debt associated with the Company's 2020 Notes in the amount of $496.6 million and $496.5 million at March 31, 2013 and December 31, 2012, respectively, and the 2021 Notes in the amount of $450.0 million at March 31, 2013 was carried at cost. The estimated fair value of the Company's term loan A, term loan B, 2020 Notes and 2021 Notes was $657.0 million, $983.3 million, $543.1 million and $461.2 million at March 31, 2013, respectively, based on similar transactions and yields in an active market for similarly rated debt (Level 2).
Note 12Segment Information
The Company's reportable segments are strategic business units arranged geographically which have separate management teams. These reportable segments are U.S. Operations, Canadian and U.K. Operations, and Other. Both the U.S. Operations and Canadian and U.K. Operations reportable segments' primary business is that of mining and exporting metallurgical coal for the steel industry. The Other segment primarily includes corporate expenses.
The accounting policies of the segments are the same as those described in Note 2 of the Notes to Consolidated Financial Statements included in the Company's Annual Report filed with the Securities and Exchange Commission on Form 10-K for the fiscal year ended December 31, 2012. The Company evaluates performance primarily based on operating income of the respective business segments.
22
WALTER ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
THREE MONTHS ENDED MARCH 31, 2013 (Unaudited)
Note 12Segment Information (Continued)
Summarized financial information of the Company's reportable segments is shown in the following table (in thousands):
|
For the three months ended March 31, |
||||||
---|---|---|---|---|---|---|---|
|
2013 | 2012 | |||||
Revenues: |
|||||||
U.S. Operations |
$ | 339,225 | $ | 452,150 | |||
Canadian and U.K. Operations |
151,444 | 178,351 | |||||
Other |
674 | 1,062 | |||||
Total Revenues |
$ | 491,343 | $ | 631,563 | |||
Segment operating income (loss): |
|||||||
U.S. Operations |
$ | (6,957 | ) | $ | 106,981 | ||
Canadian and U.K. Operations |
(48,766 | ) | (13,555 | ) | |||
Other |
(7,897 | ) | (9,350 | ) | |||
Total operating income (loss) |
(63,620 | ) | 84,076 | ||||
Less interest expense, net |
(51,968 | ) | (27,790 | ) | |||
Other income (loss) |
105 | (6,993 | ) | ||||
Income (loss) before income tax expense |
(115,483 | ) | 49,293 | ||||
Income tax expense (benefit) |
(66,039 | ) | 8,677 | ||||
Net income (loss) |
$ | (49,444 | ) | $ | 40,616 | ||
Depreciation and depletion: |
|||||||
U.S. Operations |
$ | 47,473 | $ | 42,142 | |||
Canadian and U.K. Operations |
33,232 | 24,136 | |||||
Other |
485 | 215 | |||||
Total |
$ | 81,190 | $ | 66,493 | |||
Capital expenditures: |
|||||||
U.S. Operations |
$ | 27,401 | $ | 36,112 | |||
Canadian and U.K. Operations |
6,314 | 84,180 | |||||
Other |
312 | 553 | |||||
Total |
$ | 34,027 | $ | 120,845 | |||
|
March 31, 2013 |
December 31, 2012 |
|||||
---|---|---|---|---|---|---|---|
Identifiable assets: |
|||||||
U.S. Operations |
$ | 1,438,289 | $ | 1,603,745 | |||
Canadian and U.K. Operations |
3,918,439 | 3,728,817 | |||||
Other |
526,714 | 435,858 | |||||
Total |
$ | 5,883,442 | $ | 5,768,420 | |||
23
WALTER ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
THREE MONTHS ENDED MARCH 31, 2013 (Unaudited)
Note 13Supplemental Guarantor and Non-Guarantor Financial Information
On November 21, 2012, the Company completed a private placement of $500.0 million in aggregate principal amount of 9.875% senior notes due December 15, 2020 ("2020 Notes") and on March 27, 2013, the Company completed a private placement of $450.0 million in aggregate principal amount of 8.5% senior notes due April 15, 2021 ("2021 Notes"). The 2020 Notes and 2021 Notes are unconditionally guaranteed, jointly and severally, on an unsecured basis, by each of the Company's current and future wholly-owned U.S. domestic restricted subsidiaries. In connection with the private placements, the guarantors entered into registration rights agreements with the initial purchasers in which the Company agreed, among other things, to file a registration statement covering an offer to exchange the 2020 Notes and 2021 Notes for a new issue of exchange notes registered under the Securities Act of 1933 with substantially identical terms. The Company intends to file a registration statement on Form S-4 with the Securities and Exchange Commission for each of the senior notes and is providing the information below to provide supplemental guarantor financial information pursuant to Rule 3-10(f) of Regulation S-X. The following tables present unaudited condensed consolidating
24
WALTER ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
THREE MONTHS ENDED MARCH 31, 2013 (Unaudited)
Note 13Supplemental Guarantor and Non-Guarantor Financial Information (Continued)
financial information for (i) the Company, (ii) the issuer of the senior notes, (iii) the guarantors under the senior notes, and (iv) the entities which are not guarantors of the senior notes:
WALTER ENERGY, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEETS (UNAUDITED)
MARCH 31, 2013
(in thousands)
|
Parent (Issuer) |
Guarantor Subsidiaries |
Non-Guarantor Subsidiaries |
Eliminations | Total Consolidated |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
ASSETS |
||||||||||||||||
Cash and cash equivalents |
$ | 200,185 | $ | 158 | $ | 35,448 | $ | | $ | 235,791 | ||||||
Receivables, net |
79,729 | 122,336 | 113,231 | | 315,296 | |||||||||||
Intercompany receivables |
| 538,342 | 75,419 | (613,761 | ) | | ||||||||||
Intercompany notes receivable |
143,263 | | | (143,263 | ) | | ||||||||||
Inventories |
| 118,744 | 183,549 | | 302,293 | |||||||||||
Deferred income taxes |
36,717 | 17,687 | 1,225 | | 55,629 | |||||||||||
Prepaid expenses |
1,374 | 40,861 | 5,206 | | 47,441 | |||||||||||
Other current assets |
18,146 | 1,128 | 4,011 | | 23,285 | |||||||||||
Total current assets |
479,414 | 839,256 | 418,089 | (757,024 | ) | 979,735 | ||||||||||
Mineral interests, net |
| 17,015 | 2,910,576 | | 2,927,591 | |||||||||||
Property, plant and equipment, net |
8,276 | 779,101 | 904,260 | | 1,691,637 | |||||||||||
Deferred income taxes |
78,056 | 112,560 | (5,229 | ) | | 185,387 | ||||||||||
Investment in subsidiaries |
3,815,313 | | | (3,815,313 | ) | | ||||||||||
Other long-term assets |
76,091 | 9,674 | 13,327 | | 99,092 | |||||||||||
|
$ | 4,457,150 | $ | 1,757,606 | $ | 4,241,023 | $ | (4,572,337 | ) | $ | 5,883,442 | |||||
LIABILITIES AND STOCKHOLDERS' EQUITY |
||||||||||||||||
Current debt |
$ | | $ | 9,277 | $ | 8,121 | $ | | $ | 17,398 | ||||||
Accounts payable |
11,588 | 80,694 | 40,758 | | 133,040 | |||||||||||
Accrued expenses |
100,956 | 87,102 | 4,855 | | 192,913 | |||||||||||
Intercompany payables |
613,761 | | | (613,761 | ) | | ||||||||||
Intercompany notes payable |
| | 143,263 | (143,263 | ) | | ||||||||||
Accumulated postretirement benefits obligation |
131 | 29,506 | | | 29,637 | |||||||||||
Other current liabilities |
157,201 | 23,619 | 26,508 | | 207,328 | |||||||||||
Total current liabilities |
883,637 | 230,198 | 223,505 | (757,024 | ) | 580,316 | ||||||||||
Long-term debt |
2,581,327 | 115 | 12,142 | | 2,593,584 | |||||||||||
Deferred income taxes |
| | 883,659 | | 883,659 | |||||||||||
Accumulated postretirement benefits obligation |
435 | 635,694 | | | 636,129 | |||||||||||
Other long-term liabilities |
46,081 | 128,839 | 69,164 | | 244,084 | |||||||||||
Total liabilities |
3,511,480 | 994,846 | 1,188,470 | (757,024 | ) | 4,937,772 | ||||||||||
Stockholders' equity |
945,670 | 762,760 | 3,052,553 | (3,815,313 | ) | 945,670 | ||||||||||
Total liabilities and stockholders' equity |
$ | 4,457,150 | $ | 1,757,606 | $ | 4,241,023 | $ | (4,572,337 | ) | $ | 5,883,442 | |||||
25
WALTER ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
THREE MONTHS ENDED MARCH 31, 2013 (Unaudited)
Note 13Supplemental Guarantor and Non-Guarantor Financial Information (Continued)
WALTER ENERGY, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEETS (Unaudited)
DECEMBER 31, 2012
(in thousands)
|
Parent (Issuer) |
Guarantor Subsidiaries |
Non-Guarantor Subsidiaries |
Eliminations | Total Consolidated |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
ASSETS |
||||||||||||||||
Cash and cash equivalents |
$ | 83,833 | $ | 61 | $ | 32,707 | $ | | $ | 116,601 | ||||||
Receivables, net |
64,106 | 113,182 | 79,679 | | 256,967 | |||||||||||
Intercompany receivables |
153,933 | 507,519 | | (661,452 | ) | | ||||||||||
Intercompany notes receivable |
118,079 | | | (118,079 | ) | | ||||||||||
Inventories |
| 131,893 | 174,125 | | 306,018 | |||||||||||
Deferred income taxes |
39,375 | 17,687 | 1,464 | | 58,526 | |||||||||||
Prepaid expenses |
1,869 | 45,327 | 6,580 | | 53,776 | |||||||||||
Other current assets |
17,559 | 1,109 | 5,260 | | 23,928 | |||||||||||
Total current assets |
478,754 | 816,778 | 299,815 | (779,531 | ) | 815,816 | ||||||||||
Mineral interests, net |
| 18,475 | 2,947,082 | | 2,965,557 | |||||||||||
Property, plant and equipment, net |
8,448 | 790,900 | 932,783 | | 1,732,131 | |||||||||||
Deferred income taxes |
52,363 | 112,560 | (4,501 | ) | | 160,422 | ||||||||||
Goodwill |
| | | | | |||||||||||
Investment in subsidiaries |
3,530,094 | | | (3,530,094 | ) | | ||||||||||
Other long-term assets |
71,622 | 9,375 | 13,497 | | 94,494 | |||||||||||
|
$ | 4,141,281 | $ | 1,748,088 | $ | 4,188,676 | $ | (4,309,625 | ) | $ | 5,768,420 | |||||
LIABILITIES AND STOCKHOLDERS' EQUITY |
||||||||||||||||
Current debt |
$ | | $ | 10,196 | $ | 8,597 | $ | | $ | 18,793 | ||||||
Accounts payable |
5,128 | 78,260 | 31,525 | | 114,913 | |||||||||||
Accrued expenses |
27,197 | 83,155 | 74,523 | | 184,875 | |||||||||||
Intercompany payables |
507,519 | | 153,933 | (661,452 | ) | | ||||||||||
Intercompany notes payable |
| | 118,079 | (118,079 | ) | | ||||||||||
Accumulated postretirement benefits obligation |
131 | 29,069 | | | 29,200 | |||||||||||
Other current liabilities |
157,044 | 24,389 | 25,040 | | 206,473 | |||||||||||
Total current liabilities |
697,019 | 225,069 | 411,697 | (779,531 | ) | 554,254 | ||||||||||
Long-term debt |
2,381,255 | 1,784 | 14,333 | | 2,397,372 | |||||||||||
Deferred income taxes |
| | 921,687 | | 921,687 | |||||||||||
Accumulated postretirement benefits obligation |
452 | 632,812 | | | 633,264 | |||||||||||
Other long-term liabilities |
51,984 | 128,593 | 70,695 | | 251,272 | |||||||||||
Total liabilities |
3,130,710 | 988,258 | 1,418,412 | (779,531 | ) | 4,757,849 | ||||||||||
Stockholders' equity |
1,010,571 | 759,830 | 2,770,264 | (3,530,094 | ) | 1,010,571 | ||||||||||
Total liabilities and stockholders' equity |
$ | 4,141,281 | $ | 1,748,088 | $ | 4,188,676 | $ | (4,309,625 | ) | $ | 5,768,420 | |||||
26
WALTER ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
THREE MONTHS ENDED MARCH 31, 2013 (Unaudited)
Note 13Supplemental Guarantor and Non-Guarantor Financial Information (Continued)
WALTER ENERGY, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2013
(in
thousands)
|
Parent (Issuer) |
Guarantor Subsidiaries |
Non-Guarantor Subsidiaries |
Eliminations | Total Consolidated |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Revenues: |
||||||||||||||||
Sales |
$ | | $ | 314,812 | $ | 174,797 | $ | | $ | 489,609 | ||||||
Miscellaneous income (loss) |
553 | 2,190 | (1,009 | ) | | 1,734 | ||||||||||
|
553 | 317,002 | 173,788 | | 491,343 | |||||||||||
Cost and expenses: |
||||||||||||||||
Cost of sales (exclusive of depreciation and depletion) |
| 247,677 | 173,257 | | 420,934 | |||||||||||
Depreciation and depletion |
485 | 40,410 | 40,295 | | 81,190 | |||||||||||
Selling, general and administrative |
13,567 | 6,943 | 10,164 | | 30,674 | |||||||||||
Postretirement benefits |
(55 | ) | 14,780 | | | 14,725 | ||||||||||
Restructuring charges |
| 116 | 7,324 | | 7,440 | |||||||||||
|
13,997 | 309,926 | 231,040 | | 554,963 | |||||||||||
Operating income (loss) |
(13,444 | ) | 7,076 | (57,252 | ) | | (63,620 | ) | ||||||||
Interest expense |
(50,156 | ) | 590 | (3,052 | ) | | (52,618 | ) | ||||||||
Interest income |
15 | | 635 | | 650 | |||||||||||
Other income |
| | 105 | | 105 | |||||||||||
Loss before income tax expense |
(63,585 | ) | 7,666 | (59,564 | ) | | (115,483 | ) | ||||||||
Income tax benefit |
(26,667 | ) | (3,396 | ) | (35,976 | ) | | (66,039 | ) | |||||||
|
(36,918 | ) | 11,062 | (23,588 | ) | | (49,444 | ) | ||||||||
Equity in losses of subsidiaries |
(12,526 | ) | | | 12,526 | | ||||||||||
Net income (loss) |
$ | (49,444 | ) | $ | 11,062 | $ | (23,588 | ) | $ | 12,526 | $ | (49,444 | ) | |||
27
WALTER ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
THREE MONTHS ENDED MARCH 31, 2013 (Unaudited)
Note 13Supplemental Guarantor and Non-Guarantor Financial Information (Continued)
WALTER ENERGY, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2012
(in thousands)
|
Parent (Issuer) |
Guarantor Subsidiaries |
Non-Guarantor Subsidiaries |
Eliminations | Total Consolidated |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Revenues: |
||||||||||||||||
Sales |
$ | | $ | 413,654 | $ | 213,644 | $ | | $ | 627,298 | ||||||
Miscellaneous income (loss) |
675 | 4,071 | (481 | ) | | 4,265 | ||||||||||
|
675 | 417,725 | 213,163 | | 631,563 | |||||||||||
Cost and expenses: |
||||||||||||||||
Cost of sales (exclusive of depreciation and depletion) |
| 246,205 | 185,329 | | 431,534 | |||||||||||
Depreciation and depletion |
215 | 34,367 | 31,911 | | 66,493 | |||||||||||
Selling, general and administrative |
10,729 | 12,148 | 13,370 | | 36,247 | |||||||||||
Postretirement benefits |
(112 | ) | 13,325 | | | 13,213 | ||||||||||
|
10,832 | 306,045 | 230,610 | | 547,487 | |||||||||||
Operating income (loss) |
(10,157 | ) | 111,680 | (17,447 | ) | | 84,076 | |||||||||
Interest expense |
(27,224 | ) | (286 | ) | (557 | ) | | (28,067 | ) | |||||||
Interest income |
47 | | 230 | | 277 | |||||||||||
Other income (loss) |
3,019 | | (10,012 | ) | | (6,993 | ) | |||||||||
Income (loss) before income tax expense |
(34,315 | ) | 111,394 | (27,786 | ) | | 49,293 | |||||||||
Income tax expense (benefit) |
(9,982 | ) | 32,261 | (13,602 | ) | | 8,677 | |||||||||
|
(24,333 | ) | 79,133 | (14,184 | ) | | 40,616 | |||||||||
Equity in earnings of subsidiaries |
64,949 | | | (64,949 | ) | | ||||||||||
Net income (loss) |
$ | 40,616 | $ | 79,133 | $ | (14,184 | ) | $ | (64,949 | ) | $ | 40,616 | ||||
28
WALTER ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
THREE MONTHS ENDED MARCH 31, 2013 (Unaudited)
Note 13Supplemental Guarantor and Non-Guarantor Financial Information (Continued)
WALTER ENERGY, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
THREE MONTHS ENDED MARCH 31,
2013
(in thousands)
|
Parent (Issuer) |
Guarantor Subsidiaries |
Non-Guarantor Subsidiaries |
Eliminations | Total Consolidated |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Net income (loss) |
$ | (49,444 | ) | $ | 11,062 | $ | (23,588 | ) | $ | 12,526 | $ | (49,444 | ) | |||
Other comprehensive income (loss), net of tax: |
||||||||||||||||
Change in pension and postretirement benefit plans, net of tax |
4,659 | | | | 4,659 | |||||||||||
Change in unrealized gain on hedges, net of tax |
722 | 21 | | (21 | ) | 722 | ||||||||||
Change in foreign currency translation adjustment |
(15,625 | ) | | (15,625 | ) | 15,625 | (15,625 | ) | ||||||||
Change in unrealized gain on investments |
44 | | 44 | (44 | ) | 44 | ||||||||||
Total other comprehensive income (loss), net of tax |
(10,200 | ) | 21 | (15,581 | ) | 15,560 | (10,200 | ) | ||||||||
Total comprehensive income (loss) |
$ | (59,644 | ) | $ | 11,083 | $ | (39,169 | ) | $ | 28,086 | $ | (59,644 | ) | |||
29
WALTER ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
THREE MONTHS ENDED MARCH 31, 2013 (Unaudited)
Note 13Supplemental Guarantor and Non-Guarantor Financial Information (Continued)
WALTER ENERGY, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2012
(in thousands)
|
Parent (Issuer) |
Guarantor Subsidiaries |
Non-Guarantor Subsidiaries |
Eliminations | Total Consolidated |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Net income (loss) |
$ | 40,616 | $ | 79,133 | $ | (14,184 | ) | $ | (64,949 | ) | $ | 40,616 | ||||
Other comprehensive income (loss), net of tax: |
||||||||||||||||
Change in pension and postretirement benefit plans, net of tax |
3,898 | (50,756 | ) | | 50,756 | 3,898 | ||||||||||
Change in unrealized gain (loss) on hedges, net of tax |
(1,283 | ) | 20 | (690 | ) | 670 | (1,283 | ) | ||||||||
Change in foreign currency translation adjustment |
2,419 | | 2,419 | (2,419 | ) | 2,419 | ||||||||||
Change in unrealized gain on investments |
(369 | ) | | (369 | ) | 369 | (369 | ) | ||||||||
Total other comprehensive income (loss), net of tax |
4,665 | (50,736 | ) | 1,360 | 49,376 | 4,665 | ||||||||||
Total comprehensive income (loss) |
$ | 45,281 | $ | 28,397 | $ | (12,824 | ) | $ | (15,573 | ) | $ | 45,281 | ||||
30
WALTER ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
THREE MONTHS ENDED MARCH 31, 2013 (Unaudited)
Note 13Supplemental Guarantor and Non-Guarantor Financial Information (Continued)
WALTER ENERGY, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2013
(in
thousands)
|
Parent (Issuer) |
Guarantor Subsidiaries |
Non-Guarantor Subsidiaries |
Eliminations | Total Consolidated |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Cash flows provided by (used in) operating activities |
$ | (28,029 | ) | $ | 65,848 | $ | (57,217 | ) | $ | | $ | (19,398 | ) | |||
INVESTING ACTIVITIES |
||||||||||||||||
Additions to property, plant and equipment |
(314 | ) | (24,545 | ) | (9,168 | ) | | (34,027 | ) | |||||||
Intercompany notes issued |
(45,591 | ) | | | 45,591 | | ||||||||||
Intercompany notes proceeds |
22,000 | | | (22,000 | ) | | ||||||||||
Investments in subsidiaries |
(50,103 | ) | | | 50,103 | | ||||||||||
Other |
| | 1,021 | | 1,021 | |||||||||||
Cash flows used in investing activities |
(74,008 | ) | (24,545 | ) | (8,147 | ) | 73,694 | (33,006 | ) | |||||||
FINANCING ACTIVITIES |
||||||||||||||||
Proceeds from issuance of debt |
450,000 | | | | 450,000 | |||||||||||
Borrowings under revolving credit agreement |
| | 320,778 | | 320,778 | |||||||||||
Repayments on revolving credit agreement |
| | (320,778 | ) | | (320,778 | ) | |||||||||
Retirements of debt |
(250,000 | ) | (2,588 | ) | (2,099 | ) | | (254,687 | ) | |||||||
Dividends paid |
(7,816 | ) | | | | (7,816 | ) | |||||||||
Excess tax deficit from stock-based compensation arrangements |
(195 | ) | (177 | ) | | | (372 | ) | ||||||||
Proceeds from stock options exercised |
279 | | | | 279 | |||||||||||
Debt issuance costs |
(15,163 | ) | | | | (15,163 | ) | |||||||||
Advances from (to) consolidated entities |
41,521 | (38,443 | ) | (3,078 | ) | | | |||||||||
Intercompany notes borrowings |
| | 45,591 | (45,591 | ) | | ||||||||||
Intercompany notes payments |
| | (22,000 | ) | 22,000 | | ||||||||||
Investment from Parent |
| | 50,103 | (50,103 | ) | | ||||||||||
Other |
(237 | ) | 2 | | | (235 | ) | |||||||||
Cash flows provided by (used in) financing activities |
218,389 | (41,206 | ) | 68,517 | (73,694 | ) | 172,006 | |||||||||
Effect of foreign exchange rates on cash |
| | (412 | ) | | (412 | ) | |||||||||
Net increase in cash and cash equivalents |
$ | 116,352 | $ | 97 | $ | 2,741 | $ | | $ | 119,190 | ||||||
Cash and cash equivalents at beginning of period |
83,833 | 61 | 32,707 | | 116,601 | |||||||||||
Cash and cash equivalents at end of period |
$ | 200,185 | $ | 158 | $ | 35,448 | $ | | $ | 235,791 | ||||||
31
WALTER ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
THREE MONTHS ENDED MARCH 31, 2013 (Unaudited)
Note 13Supplemental Guarantor and Non-Guarantor Financial Information (Continued)
WALTER ENERGY, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2012
(in thousands)
|
Parent (Issuer) |
Guarantor Subsidiaries |
Non-Guarantor Subsidiaries |
Eliminations | Total Consolidated |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Cash flows provided by (used in) operating activities |
$ | (57,822 | ) | $ | 145,851 | $ | (17,175 | ) | $ | | $ | 70,854 | ||||
INVESTING ACTIVITIES |
||||||||||||||||
Additions to property, plant and equipment |
(630 | ) | (31,461 | ) | (88,754 | ) | | (120,845 | ) | |||||||
Proceeds from sales of investments |
| | 12,228 | | 12,228 | |||||||||||
Intercompany notes issued |
(11,101 | ) | | | 11,101 | | ||||||||||
Other |
| (85 | ) | | | (85 | ) | |||||||||
Cash flows used in investing activities |
(11,731 | ) | (31,546 | ) | (76,526 | ) | 11,101 | (108,702 | ) | |||||||
FINANCING ACTIVITIES |
||||||||||||||||
Borrowings under revolving credit agreement |
| | 135,294 | | 135,294 | |||||||||||
Repayments on revolving credit agreement |
| | (70,156 | ) | | (70,156 | ) | |||||||||
Retirements of debt |
| (1,983 | ) | (7,194 | ) | | (9,177 | ) | ||||||||
Dividends paid |
(7,806 | ) | | | | (7,806 | ) | |||||||||
Excess tax benefits from stock-based compensation arrangements |
783 | | | | 783 | |||||||||||
Proceeds from stock options exercised |
120 | | | | 120 | |||||||||||
Advances from (to) consolidated entities |
104,534 | (112,293 | ) | 7,759 | | | ||||||||||
Intercompany notes borrowings |
| | 11,101 | (11,101 | ) | | ||||||||||
Other |
(647 | ) | 1 | (881 | ) | | (1,527 | ) | ||||||||
Cash flows provided by (used in) financing activities |
96,984 | (114,275 | ) | 75,923 | (11,101 | ) | 47,531 | |||||||||
Effect of foreign exchange rates on cash |
| | 87 | | 87 | |||||||||||
Net increase (decrease) in cash and cash equivalents |
$ | 27,431 | $ | 30 | $ | (17,691 | ) | $ | | $ | 9,770 | |||||
Cash and cash equivalents at beginning of period |
99,086 | 79 | 29,265 | | 128,430 | |||||||||||
Cash and cash equivalents at end of period |
$ | 126,517 | $ | 109 | $ | 11,574 | $ | | $ | 138,200 | ||||||
32
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with our financial statements and related notes included elsewhere in this Quarterly Report and our Annual Report on Form 10-K for the year ended December 31, 2012.
CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS
This report includes statements of our expectations, intentions, plans and beliefs that constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act") and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and are intended to come within the safe harbor protection provided by those sections. These statements, which involve risks and uncertainties, relate to analyses and other information that are based on forecasts of future results and estimates of amounts not yet determinable and may also relate to our future prospects, developments and business strategies. We have used the words "anticipate," "believe," "could," "estimate," "expect," "intend," "may," "plan," "predict," "project," "should" 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. These risks and uncertainties include, but are not limited to:
33
When considering forward-looking statements made by us in this Quarterly Report on Form 10-Q ("Form 10-Q"), or elsewhere, such statements speak only as of the date on which we make them. 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 Form 10-Q after the date of this Form 10-Q, except as may be required by law. In light of these risks and uncertainties, keep in mind that any forward-looking statement made in this Form 10-Q or elsewhere might not occur.
34
Overview
Walter Energy, Inc. ("Walter") is a leading producer and exporter of metallurgical coal for the global steel industry from underground and surface mines located in the United States, Canada and the United Kingdom. We also extract, process, market and/or possess mineral reserves of thermal coal and anthracite coal, as well as produce metallurgical coke and coal bed methane gas.
We currently operate 11 active coal mines, a coke plant and a coal bed methane extraction operation located throughout Alabama, West Virginia, Northeast British Columbia and the U.K. We operate our business through two principal business segments: U.S. Operations and Canadian and U.K. Operations. The U.S. Operations segment includes hard coking coal and thermal coal mines in both Alabama and West Virginia, a coke plant in Alabama, and coal bed methane extraction operations located in Alabama. The Canadian mining operations currently operate three surface metallurgical coal mines in Northeast British Columbia's coalfields (the Wolverine Mine, the Brule Mine, and the Willow Creek Mine). Our U.K. mining operation consists of an idled underground and an idled surface mine located in South Wales. The underground mine produced anthracite coal, which can be sold as a low-volatile PCI coal and the surface mine operations produced thermal coal.
Sales of metallurgical coal for the three months ended March 31, 2013 were 2.8 million metric tons and accounted for approximately 88% of our coal sales volume. Comparatively, for the three months ended March 31, 2012, sales of metallurgical coal were 2.4 million metric tons and accounted for approximately 75% of our coal sales volume. The increase in metallurgical coal sales volume as a percentage of our total coal sales volume in comparison to the prior year comparable quarter is consistent with our business strategy of increasing profitable, high quality metallurgical coal production and sales volume, as metallurgical coal generally sells for prices significantly higher than those for thermal coal.
For the three months ended March 31, 2013, sales of thermal coal were 387 thousand metric tons and accounted for approximately 12% of our coal sales volume. Comparatively, for the three months ended March 31, 2012, sales of thermal coal were 807 thousand metric tons and accounted for approximately 25% of our coal sales volume.
Industry Overview and Outlook
During 2012, the metallurgical coal market was adversely impacted by a combination of slowing Chinese demand growth, the weak economic environment in Europe and the recovery of Australian supply, all of which resulted in an oversupply of metallurgical coal. This oversupply of metallurgical coal put pressure on the selling price of metallurgical coal reducing the price to levels not experienced in several years. According to the World Steel Association Short Range Outlook for 2013 and 2014, steel use during 2012 increased at the slowest rate since 2009 when demand declined by 6.5%. In the early part of 2013, the key risks to the global economy surrounding the Eurozone crisis and the U.S. fiscal cliff issue have stabilized and a recovery in global steel demand is expected by the second half of 2013, led by emerging economies. However, a recent downward trend in short-term growth expectations for China's economy has added a level of uncertainty to the second half of 2013 pricing expectations. In 2014, the World Steel Association expects a further pickup in global steel demand with the developed economies increasingly contributing to the growth.
During the first quarter of 2013 supply-demand imbalance resulted in a benchmark for high quality metallurgical coal of $165. Although the benchmark for high quality coals decreased in the first quarter of 2013, our average realized metallurgical coal sales prices improved compared to the fourth quarter of 2012 due to higher sales volume of our premium low-volatile hard coking coal as a percentage of total metallurgical coal sales.
35
We have seen evidence of stronger demand and improved pricing for the second quarter of 2013, as the second quarter benchmark price of hard coking coal is approximately $172 per metric ton and $141 per metric ton for low-volatile PCI. Although we anticipate a slight improvement in average realized metallurgical coal prices the second quarter of 2013, the latest estimates of China's economic short-term growth combined with ample supply to the market has driven the spot market prices down causing the third quarter of 2013 pricing to be less certain and the recovery in the global economy and metallurgical coal markets continues to be volatile and remain uncertain. Although the remainder of 2013 remains uncertain, according to the World Steel Association Short Range Outlook for 2013 and 2014, global steel use is expected to increase by 2.9% in 2013 and by 3.2% in 2014.
Our management strives to aggressively control costs and improve operating performance. During the three months ended March 31, 2013, we announced the planned curtailment of production at our Willow Creek mine in the Canadian and U.K. Operations segment. The Company also plans to close the operations at the North River mine in the U.S. Operations segment approximately nine months earlier than the previously expected end of mine life of 2014. The Willow Creek surface mine reserves primarily consist of metallurgical coal comprised of an estimated one-third hard coking coal and two-thirds low-volatile PCI. The North River mine reserves primarily consist of thermal coal. Due to the Willow Creek mine curtailment, for the three months ended March 31, 2013, we recognized severance charges of $4.4 million and contract termination costs of $3.0 million. In addition to the curtailment of these operations, in the previous twelve months the Company idled the development spending at the Aberpergwm mine in South Wales, idled the Gauley Eagle surface mine in West Virginia and curtailed production at its Maple underground mine in West Virginia. The curtailment and in some cases the idling of these higher-cost and lower-quality coal production mines allows us to focus on our higher margin and higher-quality coal mine operations. We believe these actions position us well as we look ahead to the remainder of 2013. We will continue to evaluate market conditions and will make further adjustments if market conditions warrant.
Despite the short-term challenges, we believe the long-term demand for metallurgical coal within all of our geographic markets is anticipated to be strong as industry projections indicate that global steelmaking will continue to require increasing amounts of high quality metallurgical coal, which is a limited commodity. As such, we are focused on the long-term metallurgical coal market as we anticipate strong long-term demand for the high-quality metallurgical coals we produce. Although we have responded to the short-term deterioration in market conditions by curtailing and in some cases idling higher-cost and lower-quality coal production mines, when the market rebounds from its current weakness, we have the capability to increase our metallurgical coal production to take advantage of such potential opportunities in this highly volatile market.
Even though we have taken steps to curtail and in some cases idle lower margin mines, we expect 2013 metallurgical coal production to be approximately 11.0 million tons as we expect to operate our higher margin hard coking coal mines at capacity.
36
RESULTS OF OPERATIONS
Summary Operating Results for the
Three Months Ended March 31, 2013 and 2012
|
For the three months ended March 31, 2013 | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(in thousands)
|
U.S. Operations |
Canadian and U.K. Operations |
Other | Total | |||||||||
Sales |
$ | 336,741 | $ | 152,803 | $ | 65 | $ | 489,609 | |||||
Miscellaneous income (loss) |
2,484 | (1,359 | ) | 609 | 1,734 | ||||||||
Revenues |
339,225 | 151,444 | 674 | 491,343 | |||||||||
Cost of sales (exclusive of depreciation and depletion) |
269,548 | 151,371 | 15 | 420,934 | |||||||||
Depreciation and depletion |
47,473 | 33,232 | 485 | 81,190 | |||||||||
Selling, general and administrative |
14,265 | 8,283 | 8,126 | 30,674 | |||||||||
Postretirement benefits |
14,780 | | (55 | ) | 14,725 | ||||||||
Restructuring charges |
116 | 7,324 | | 7,440 | |||||||||
Operating loss |
$ | (6,957 | ) | $ | (48,766 | ) | $ | (7,897 | ) | (63,620 | ) | ||
Interest expense, net |
(51,968 | ) | |||||||||||
Other income |
105 | ||||||||||||
Income tax benefit |
66,039 | ||||||||||||
Net loss |
$ | (49,444 | ) | ||||||||||
|
For the three months ended March 31, 2012 | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(in thousands)
|
U.S. Operations |
Canadian and U.K. Operations |
Other | Total | |||||||||
Sales |
$ | 446,118 | $ | 180,830 | $ | 350 | $ | 627,298 | |||||
Miscellaneous income (loss) |
6,032 | (2,479 | ) | 712 | 4,265 | ||||||||
Revenues |
452,150 | 178,351 | 1,062 | 631,563 | |||||||||
Cost of sales (exclusive of depreciation and depletion) |
276,575 | 154,404 | 555 | 431,534 | |||||||||
Depreciation and depletion |
42,142 | 24,136 | 215 | 66,493 | |||||||||
Selling, general and administrative |
13,127 | 13,366 | 9,754 | 36,247 | |||||||||
Postretirement benefits |
13,325 | | (112 | ) | 13,213 | ||||||||
Operating income (loss) |
$ | 106,981 | $ | (13,555 | ) | $ | (9,350 | ) | 84,076 | ||||
Interest expense, net |
(27,790 | ) | |||||||||||
Other loss |
(6,993 | ) | |||||||||||
Income tax expense |
(8,677 | ) | |||||||||||
Net income |
$ | 40,616 | |||||||||||
37
|
Dollar variance for the three months ended March 31, 2013 versus 2012 |
||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(in thousands)
|
U.S. Operations |
Canadian and U.K. Operations |
Other | Total | |||||||||
Sales |
$ | (109,377 | ) | $ | (28,027 | ) | $ | (285 | ) | $ | (137,689 | ) | |
Miscellaneous income (loss) |
(3,548 | ) | 1,120 | (103 | ) | (2,531 | ) | ||||||
Revenues |
(112,925 | ) | (26,907 | ) | (388 | ) | (140,220 | ) | |||||
Cost of sales (exclusive of depreciation and depletion) |
(7,027 | ) | (3,033 | ) | (540 | ) | (10,600 | ) | |||||
Depreciation and depletion |
5,331 | 9,096 | 270 | 14,697 | |||||||||
Selling, general and administrative |
1,138 | (5,083 | ) | (1,628 | ) | (5,573 | ) | ||||||
Postretirement benefits |
1,455 | | 57 | 1,512 | |||||||||
Restructuring charges |
116 | 7,324 | | 7,440 | |||||||||
Operating income (loss) |
$ | (113,938 | ) | $ | (35,211 | ) | $ | 1,453 | (147,696 | ) | |||
Interest expense, net |
(24,178 | ) | |||||||||||
Other income (loss) |
7,098 | ||||||||||||
Income tax benefit (expense) |
74,716 | ||||||||||||
Net income (loss) |
$ | (90,060 | ) | ||||||||||
Summary of First Quarter Consolidated Results of Operations
Our net loss for the three months ended March 31, 2013 was $49.4 million, or $0.79 per diluted share, which compares to net income of $40.6 million, or $0.65 per diluted share for the three months ended March 31, 2012. The net loss is primarily due to a decrease of approximately 30% in the average selling price of metallurgical coal as a result of lower global metallurgical coal prices. Earnings before interest expense, interest income, income taxes, depreciation, depletion and amortization ("EBITDA") for the first quarter of 2013 decreased $125.9 million as compared to the first quarter of 2012 primarily due to the decrease in revenues as a result of lower pricing. A reconciliation of net income (loss) to EBITDA is presented in the Liquidity and Capital Resources section below.
Revenues for the three months ended March 31, 2013 were $491.3 million, representing a decrease of $140.2 million from $631.6 million in the same period in 2012. The decrease in revenues was primarily due to a decrease in the average selling price of metallurgical coal of $65.81, or approximately 30%, per ton due to weaker worldwide demand for metallurgical coal. The significant decrease in the average selling price was partially offset by an increase in metallurgical coal sales volumes of approximately 410,000 tons, for a 17% increase year over year.
Cost of sales, exclusive of depreciation and depletion, decreased $10.6 million to $420.9 million as compared to the first quarter of 2012 and was primarily the result of a significant improvement in per ton cost of sales for low-volatile PCI partially offset by an increase in sales volumes of metallurgical coal. The average cash cost of sales per ton of low-volatile PCI sold decreased approximately 40% from $207.70 in the first quarter of 2012 to $123.64 in the first quarter of 2013 primarily due to a concentrated effort throughout 2012 and the first quarter of 2013 to lower costs in our Canadian and U.K. Operations segment. The substantial improvement in low-volatile PCI costs reflects the results of our cost containment and restructuring initiatives.
Selling, general and administrative expense decreased $5.5 million or approximately 15% to $30.7 million, as compared to $36.2 million in the first quarter of 2012, primarily due to the reclassification of selling, general and administrative expenses as discussed in Note 1 of the "Notes to Condensed Consolidated Financial Statements" in this Form 10-Q combined with the results of our cost containment initiatives offset partially by proxy contest expenses.
38
The $0.1 million other income for the three months ended March 31, 2013 and $7.0 million other loss for the three months ended March 31, 2012 was primarily attributable to gains and losses on the sale and re-measurement to fair value of equity investments.
We recognized an income tax benefit of $66.0 million for the three months ended March 31, 2013, compared to an income tax provision of $8.7 million for the three months ended March 31, 2012. For the three months ended March 31, 2013, we determined the current year income tax benefit for the Alabama operations using the actual year-to-date financial results as compared to the estimated annual effective tax rate method utilized in 2012. The current quarter income tax benefit for the Canada, U.K. and West Virginia operations is based upon an estimated annual effective tax rate method. The 2013 and 2012 effective tax rates also reflect the benefit of our Canadian and U.K. operations which are taxed at statutory rates lower than the U.S. rate, and the effects of tax losses in excess of losses related to foreign financing activities. The effective tax rates also reflect statutory depletion deductions in the Alabama mining operations.
The current and prior year period results also include the impact of factors discussed in the following segment analysis.
Segment Analysis
U.S. Operations
Hard coking coal sales totaled 1.7 million metric tons for the three months ended March 31, 2013, representing an increase of 11.1% compared to 1.5 million metric tons during the same period in 2012 due to continued demand for our high quality low and mid-volatility hard coking coal produced at the No. 4 and No. 7 mines. Our hard coking coal production totaled 1.7 million metric tons in the first quarter of 2013, a decrease of 11.7% from the same period in the prior year primarily as a result of lower production at the Alabama underground operations due to the operation of three longwall panels in our Alabama operations in the current quarter as opposed to the operation of four longwall panels during the three months ended March 31, 2012 and due to two longwall panel moves in the current quarter. The average selling price of hard coking coal in the first quarter of 2013 was $157.28 per metric ton, representing a 29.0% decrease from the average selling price of $221.22 per metric ton for the same period in 2012. The decrease in the average selling price of hard coking coal reflects the current depressed market conditions in the metallurgical coal market. The average cash cost of sales per ton of hard coking coal sold during the first quarter of 2013 was $109.76, a slight decrease from the average cash cost of sales per ton of hard coking coal sold during the first quarter of 2012 of $110.33.
Thermal coal sales and production totaled approximately 400 thousand metric tons for the three months ended March 31, 2013, a decrease of approximately 50.0% compared to approximately 800 thousand metric tons during the same period in 2012 primarily due to difficult mining conditions at the North River mine in Alabama and the idling of a thermal coal surface mine in the second quarter of 2012 due to lower demand and pricing. The average selling price of thermal coal for the first quarter of 2013 was $64.23 per metric ton, down 9.9% from the average selling price of $71.27 per metric ton for the same period in 2012, which was primarily attributable to the continued softening of demand for thermal coal. The average cash cost of sales per ton of thermal coal sold during the first quarter of 2013 was $90.34 compared to $78.87 for the same period in 2012 as a result of difficult mining conditions at our North River mine. In response to the continued deterioration in coal markets, we continue to take steps to reduce operations at lower margin mines and we plan to close our North River thermal coal mine in 2013 approximately nine months earlier than the previously expected end of mine life of 2014.
39
Statistics for U.S. Operations are presented in the following table:
|
Three months ended March 31, |
||||||
---|---|---|---|---|---|---|---|
|
2013 | 2012 | |||||
Tons of hard coking coal sold(1) (in thousands) |
1,706 | 1,535 | |||||
Tons of hard coking coal produced (in thousands) |
1,738 | 1,969 | |||||
Average hard coking coal selling price(1) (per metric ton) |
$ | 157.28 | $ | 221.22 | |||
Average hard coking coal cash cost of sales(1) (per metric ton) |
$ | 109.76 | $ | 110.33 | |||
Average hard coking coal cash cost of production (per metric ton) |
$ | 78.11 | $ | 71.68 | |||
Tons of thermal coal sold (in thousands) |
383 | 782 | |||||
Tons of thermal coal produced (in thousands) |
434 | 816 | |||||
Average thermal coal selling price (per metric ton) |
$ | 64.23 | $ | 71.27 | |||
Average thermal coal cash cost of sales (per metric ton) |
$ | 90.34 | $ | 78.87 | |||
Average thermal coal cash cost of production (per metric ton) |
$ | 76.16 | $ | 60.74 |
Our U.S. Operations segment reported revenues of $339.2 million for the three months ended March 31, 2013, representing a decrease of $112.9 million from the same period last year. The decrease in revenues during the first quarter of 2013 as compared to the first quarter of 2012 was primarily attributable to the decline in the average selling price of both hard coking and thermal coal, partially offset by higher hard coking coal sales volumes at the Alabama underground operations.
Cost of sales, exclusive of depreciation and depletion, of our U.S. Operations segment decreased $7.0 million to $269.5 million as compared to the first quarter of 2012 despite an 11.1% increase in metallurgical coal sales volume. The decrease in cost of sales was primarily attributable to our cost containment efforts.
Our U.S. Operations segment reported an operating loss of $7.0 million for the three months ended March 31, 2013, compared to operating income of $107.0 million in the same period in 2012. The decrease in operating income was primarily due to an approximately 25.0% decrease in revenues as a result of lower global metallurgical and thermal coal pricing.
Canadian and U.K. Operations
Metallurgical coal sales for the three months ended March 31, 2013 totaled 652 thousand metric tons of hard coking coal at an average selling price of $147.00 per metric ton and 419 thousand metric tons of low-volatile PCI coal at an average selling price of $139.23 per metric ton. Metallurgical coal sales in the first quarter of 2012 totaled 322 thousand metric tons of hard coking coal at an average selling price of $250.00 per metric ton and 510 thousand metric tons of low-volatile PCI coal at an average selling price of $187.97. The declines in the average selling price of hard coking coal and low-volatile PCI coal reflect the weakened worldwide demand for metallurgical coal. The average cash cost of sales per ton of hard coking coal sold during the first quarter of 2013 was $142.13, representing a decrease of $2.96 per ton from the average cash cost of sales per ton of hard coking coal sold during the first quarter of 2012 of $145.09. The average cash cost of sales per ton of low-volatile PCI coal sold during the first quarter of 2013 was $123.64, representing a 40.5% decrease from the average cash cost of sales per ton of low-volatile PCI coal sold during the first quarter of 2012 of $207.70 as we converted from a contractor-operated to owner-operated mine. These reductions in cash cost of sales reflect the concentrated efforts throughout 2012 and 2013 to reduce costs in our Canadian and U.K. Operations.
40
Our Canadian and U.K. Operations segment produced a total of 532 thousand metric tons of hard coking coal and 487 thousand metric tons of low-volatile PCI in the first quarter of 2013. During the first quarter of 2012, the segment produced 414 thousand metric tons of hard coking coal and 611 thousand metric tons of low-volatile PCI. The increase in hard coking coal production reflects significant improvements in productivity at the Wolverine mine and the addition of hard coking coal production at the Willow Creek mine. During the first quarter of 2012 the Willow Creek mine primarily produced low-volatile PCI coal. The Willow Creek mine produced approximately 99 thousand metric tons of low-volatile hard coking coal and 155 thousand tons of low-volatile PCI in the first quarter of 2013. In connection with our focus to aggressively control cost and improve operating performance, we announced in March 2013 plans to significantly curtail production at the Willow Creek mine beginning in April 2013 until market pricing conditions improve. The 124 thousand metric tons or 20.4% decrease in low-volatile PCI production is primarily due to our actions initiated in the fourth quarter of 2012 to temporarily reduce production at the Brule mine in an effort to reduce inventory levels.
Statistics for Canadian and U.K. Operations are presented in the following table:
|
Three months ended March 31, |
||||||
---|---|---|---|---|---|---|---|
|
2013 | 2012 | |||||
Tons of hard coking coal sold (in thousands) |
652 | 322 | |||||
Tons of hard coking coal produced (in thousands) |
532 | 414 | (1) | ||||
Average hard coking coal selling price (per metric ton) |
$ | 147.00 | $ | 250.00 | |||
Average hard coking coal cash cost of sales (per metric ton) |
$ | 142.13 | $ | 145.09 | |||
Average hard coking coal cash cost of production (per metric ton) |
$ | 110.22 | $ | 108.75 | (1) | ||
Tons of low-volatile PCI coal sold (in thousands) |
419 | 510 | |||||
Tons of low-volatile PCI coal produced (in thousands) |
487 | 611 | (1) | ||||
Average low-volatile PCI coal selling price (per metric ton) |
$ | 139.23 | $ | 187.97 | |||
Average low-volatile PCI cash cost of sales (per metric ton) |
$ | 123.64 | $ | 207.70 | |||
Average low-volatile PCI cash cost of production (per metric ton) |
$ | 109.08 | $ | 135.31 | (1) |
Our Canadian and U.K. Operations segment reported revenues of $151.4 million for the first quarter of 2013, a decrease of $26.9 million from the same period last year. The decrease in revenues during the first quarter of 2013 as compared to the first quarter of 2012 was attributable to a decline of 41.2% and 25.9% in the average selling price of hard coking coal and low-volatile PCI coal, respectively.
Cost of sales, exclusive of depreciation and depletion, in our Canadian and U.K. Operations segment for the three months ended March 31, 2013 decreased $3.0 million to $151.4 million as compared to the 2012 first quarter. The decrease in cost of sales was primarily attributable to a significant improvement in cost of sales for low-volatile PCI which reflects the cost savings from
41
converting our Brule mine from contractor-operated to owner-operated and the results of cost containment initiatives.
Our Canadian and U.K. Operations segment reported an operating loss of $48.8 million for the three months ended March 31, 2013 as compared to an operating loss of $13.6 million for the same period in 2012. The operating loss for the quarter was primarily due to lower average selling prices for hard coking and low-volatile PCI coal as a result of lower global metallurgical coal pricing.
FINANCIAL CONDITION
Cash and cash equivalents increased by $119.2 million at March 31, 2013 compared to December 31, 2012 primarily due to cash flows provided by financing activities of $172.0 million due to the successful issuance of the 2021 Senior Notes offset by cash flows used in investing activities of $33.0 million and cash flows used in operating activities of $19.4 million.
Net receivables were $315.3 million at March 31, 2013, representing an increase of $58.3 million from December 31, 2012 primarily due to the timing of metallurgical coal sales during March 2013 as compared to December 2012 combined with an increase in the average selling price of metallurgical coal during the first quarter of 2013 as compared to the fourth quarter of 2012.
Net property, plant and equipment decreased by $40.5 million at March 31, 2013 as compared to December 31, 2012 primarily due to depreciation expense, partially offset by capital expenditures of $34.0 million.
LIQUIDITY AND CAPITAL RESOURCES
Overview
Our principal sources of short-term funding are our existing cash balances, operating cash flows and borrowings under our revolving credit facility. Our principal sources of long-term funding are our bank term loans entered into on April 1, 2011 and our senior notes issued in 2012 and 2013, as discussed below. Our available liquidity as of March 31, 2013 was $560 million, consisting of cash and cash equivalents of $236 million and $324 million available under the Company's $375 million revolving credit facility, net of outstanding letters of credit of $51 million. In recent quarters, we have entered into the financing transactions and amendments discussed below which have increased our interest expense. These transactions were completed to enhance liquidity and extend our debt maturities.
2021 Senior Notes
On March 27, 2013, the Company issued $450.0 million of 8.5% senior notes due April 15, 2021 (the "2021 Notes"). These Notes are unconditionally guaranteed, jointly and severally, on an unsecured basis, by each of our current and future wholly-owned U.S. domestic restricted subsidiaries. Interest on the 2021 Notes accrues at the rate of 8.5% per year and is payable semi-annually in arrears on April 15 and October 15, commencing on October 15, 2013. At any time prior to April 15, 2016, the Company may redeem up to 35% of the aggregate principal amount of the 2021 Notes at a redemption price of 108.5% of the principal amount, plus accrued and unpaid interest. The Company may redeem the 2021 Notes, in whole or in part, after April 15, 2016 and prior to April 15, 2017, at a redemption price equal to 100% of the aggregate principal amount of the 2021 Notes plus a "make-whole" premium and accrued and unpaid interest. The Company may redeem the 2021 Notes, in whole or in part at redemption prices equal to 104.25% for the twelve months commencing April 15, 2017, 102.125% for the twelve months commencing April 15, 2018 and 100% beginning on April 15, 2019, in each case plus accrued and unpaid interest.
Upon the occurrence of a change of control repurchase event with respect to the 2021 Notes, unless the Company has exercised its right to redeem the 2021 Notes, the Company will be required to
42
offer to repurchase each holder's 2021 Notes at a price equal to 101% of the aggregate principal amount, plus accrued and unpaid interest, if any, to the date of purchase.
2020 Senior Notes
On November 21, 2012, we issued $500.0 million of 9.875% senior notes due December 15, 2020 (the "2020 Notes") at an initial price of 99.302% of their face amount. The 2020 Notes are unconditionally guaranteed, jointly and severally, on an unsecured basis, by each of our current and future wholly-owned U.S. domestic restricted subsidiaries. Interest on the 2020 Notes accrues at the rate of 9.875% per year and is payable semi-annually in arrears on June 15 and December 15, beginning on June 15, 2013. We may redeem the 2020 Notes, in whole or in part, at any time prior to December 15, 2016, at a price equal to 100.000% of the aggregate principal amount of the 2020 Notes plus a "make-whole" premium, plus accrued and unpaid interest. We may redeem the 2020 Notes, in whole or in part, at any time during the twelve months commencing December 15, 2016, at 104.938% of the aggregate principal amount of the 2020 Notes, at any time during the twelve months commencing December 15, 2017, at 102.469% of the aggregate principal amount of the 2020 Notes, and at any time after December 15, 2018, at 100.000% of the aggregate principal amount of the 2020 Notes, in each case plus accrued and unpaid interest.
As market conditions warrant, we may from time to time repurchase our debt securities in privately negotiated transactions, in open market purchases, by tender offer or otherwise.
2011 Credit Agreement
On April 1, 2011, we entered into a $2.725 billion credit agreement (the "2011 Credit Agreement") to partially fund the acquisition of Western Coal and to pay off all outstanding loans under the 2005 Credit Agreement. The 2011 Credit Agreement consists of (1) a $950.0 million principal amortizing term loan A facility maturing in April 2016, at which time the remaining outstanding principal is due, (2) a $1.4 billion principal amortizing term loan B facility maturing in April 2018, at which time the remaining outstanding principal is due and (3) a $375.0 million multi-currency revolving credit facility ("Revolver") maturing in April 2016, at which time any remaining balance is due. The Revolver provides for operational needs and letters of credit. Our obligations under the 2011 Credit Agreement are secured by our domestic and foreign real, personal and intellectual property. The 2011 Credit Agreement contains customary events of default and covenants, including among other things, covenants that do not prevent but restrict us and our subsidiaries' ability to incur certain additional indebtedness, create or permit liens on assets, pay dividends and repurchase stock, engage in mergers or acquisitions, and make investments and loans. The 2011 Credit Agreement also includes certain financial covenants that must be maintained.
Credit Agreement Amendment
On March 22, 2013, the Company entered into an amendment (the "Fourth Amendment") to the 2011 Credit Agreement dated as of April 1, 2011, as amended by the First Amendment to Credit Agreement, dated as of January 20, 2012, as further amended by the Second Amendment to Credit Agreement, dated as of August 16, 2012, and as further amended by the Third Amendment to Credit Agreement dated as of October 29, 2012 among the Company, the various lenders, Morgan Stanley Senior Funding, Inc. as administrative agent, and other agents named therein. The Fourth Amendment amended a financial covenant in the 2011 Credit Agreement to provide additional flexibility for the issuance of senior unsecured notes, subject to the lessor of 100% and $250.0 million, in each case, of the net proceeds of such notes issuance being used to repay term loans outstanding under the 2011 Credit Agreement. The Fourth Amendment also provided that, should a repricing event occur within six months of the effective date of the Fourth Amendment, the Company must pay a fee equal to 1.0% of the aggregate principal amount of, as applicable, (i) the portion of the Term Loan B balance prepaid
43
in connection with such repricing event or (ii) the portion of the Term Loan B balance outstanding on such date that is subject to an effective pricing reduction pursuant to such repricing event. All other terms of the 2011 Credit Agreement, including the aggregate principal amount that may be borrowed thereunder, remained substantially unchanged.
The Revolver, term loan A and term loan B interest rates are tied to LIBOR or CDOR, plus a credit spread ranging from 350 to 450 basis points for the Revolver and term loan A and 475 basis points on the term loan B, adjusted quarterly based on the Company's total leverage ratio as defined by the amended 2011 Credit Agreement. The term loan B has a minimum LIBOR floor of 1.0%. The Revolver loans can be denominated in either U.S. dollars or Canadian dollars at our option. The commitment fee on the unused portion of the Revolver is 0.5% per year for all pricing levels.
Borrowings at March 31, 2013 under the amended 2011 Credit Agreement consisted of a term loan A balance of $656.6 million with a weighted average interest rate of 4.80%, a term loan B balance of $978.2 million with a weighted average interest rate of 5.75% and no borrowings under the Revolver, with $50.8 million in outstanding stand-by letters of credit and $324.2 million of availability for future borrowings. On March 27, 2013, the Company prepaid $250 million of the outstanding principal balances of the term loans using a portion of the net proceeds from issuance of $450.0 million 2021 Notes. As a result of these prepayments, the remaining balance of the term loan B facility is due upon maturity.
We were in compliance with all covenants under our Credit Agreement and the indenture governing our notes as of March 31, 2013. If operating results fall materially or other adverse factors occur, they could result in our being unable to comply with covenants in our Credit Agreement. A breach of covenants in the Credit Agreement, including the covenants that stipulate ratios based on Adjusted EBITDA as specifically defined under the Credit Agreement, could result in a default under the Credit Agreement and the lenders thereunder could elect to declare all amounts borrowed due and payable. Any acceleration under the Credit Agreement could result in a default under the indenture governing our notes.
Based on current forecasts and anticipated market conditions, we believe that funding provided by operating cash flows and available sources of liquidity are sufficient to meet substantially all of our operating needs, to make planned capital expenditures and to make all required interest and principal payments on indebtedness for the foreseeable future. However, our operating cash flows and liquidity are significantly influenced by numerous factors including prices of coal, coal production levels, costs of raw materials, interest rates and the general economy. Although we have observed recent improvement in the market for our products, renewed deterioration of economic conditions or deteriorating mining conditions could adversely impact our operating cash flows.
Statements of Cash Flows
Cash balances were $235.8 million and $116.6 million at March 31, 2013 and December 31, 2012, respectively. The increase in cash during the three months ended March 31, 2013 of $119.2 million primarily resulted from cash provided by financing activities of $172.0 million offset by cash used in operating activities of $19.4 million and cash used in investing activities of $33.0 million, which included capital expenditures of $34.0 million.
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The following table sets forth, for the periods indicated, selected consolidated cash flow information (in thousands):
|
Three months ended March 31, |
||||||
---|---|---|---|---|---|---|---|
|
2013 | 2012 | |||||
Cash flows provided by (used in) operating activities |
$ | (19,398 | ) | $ | 70,854 | ||
Cash flows used in investing activities |
(33,006 | ) | (108,702 | ) | |||
Cash flows provided by financing activities |
172,006 | 47,531 | |||||
Effect of foreign exchange rates on cash |
(412 | ) | 87 | ||||
Net increase in cash and cash equivalents |
$ | 119,190 | $ | 9,770 | |||
The decrease of $90.3 million in net cash provided by operating activities is primarily attributable to a $90.1 million decrease in net income as compared to the same period in 2012, resulting from the decline in the average selling price of metallurgical coal.
The decrease in cash flows used in investing activities of $75.7 million was primarily attributable to an $86.8 million decrease in capital expenditures.
The increase in cash flows provided by financing activities of $124.5 million was primarily attributable to $450.0 million of proceeds from the issuance of the 2021 Notes partially offset by retirements of existing debt of $245.5 million, a reduction in net borrowings under the revolving credit agreement of $65.1 million and debt issuance costs of $15.2 million.
Capital Expenditures
Capital expenditures totaled $34.0 million during the three months ended March 31, 2013 compared to $120.8 million during the three months ended March 31, 2012. We currently expect 2013 capital expenditures to total approximately $170 million.
EBITDA
EBITDA is defined as earnings before interest expense, interest income, income taxes, and depreciation and depletion expense. Adjusted EBITDA is defined as EBITDA further adjusted to exclude restructuring charges, proxy contest expenses and other miscellaneous items. EBITDA and adjusted EBITDA are financial measures which are not calculated in conformity with GAAP and should be considered supplemental to, and not as a substitute or superior to financial measures calculated in conformity with GAAP. We believe that these non-GAAP measures provide additional insights into the performance of the Company, and they reflect how management analyzes Company performance and compares that performance against other companies. In addition, we believe that EBITDA and adjusted EBITDA are a useful measure as some investors and analysts use EBITDA and adjusted EBITDA to compare us against other companies and to help analyze our ability to satisfy principal and interest obligations and capital expenditure needs. We believe that adjusted EBITDA presents a useful measure of our ability to incur and service debt based on ongoing operations. EBITDA and adjusted EBITDA may not be comparable to similarly titled measures used by other entities.
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Reconciliation of Net Income (Loss) to EBITDA and Adjusted EBITDA (in thousands):
|
For the three months ended March 31, |
||||||
---|---|---|---|---|---|---|---|
|
2013 | 2012 | |||||
Net income (loss) |
$ | (49,444 | ) | $ | 40,616 | ||
Add: Interest expense |
52,618 |
28,067 |
|||||
Less: Interest income |
(650 | ) | (277 | ) | |||
Add: Income tax expense (benefit) |
(66,039 | ) | 8,677 | ||||
Add: Depreciation and depletion expense |
81,190 | 66,493 | |||||
Earnings before interest, income taxes, and depreciation and depletion (EBITDA) |
$ | 17,675 | $ | 143,576 | |||
Add: Restructuring charges |
7,440 | | |||||
Add: Proxy contest expenses and other |
6,838 | | |||||
Adjusted EBITDA |
$ | 31,953 | $ | 143,576 | |||
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to certain market risks inherent in our operations. These risks generally arise from transactions entered into in the normal course of business. Our primary market risk exposures relate to interest rate risk, commodity price risk and foreign currency risks. We do not enter into derivatives or other financial instruments for trading or speculative purposes.
We have exposure to changes in interest rates under the 2011 Credit Agreement through our term loan A, term loan B and Revolver loans. As of March 31, 2013, the interest rates for the term loan A, term loan B and revolver loans are tied to LIBOR or CDOR, plus a credit spread ranging from 350 to 450 basis points for the revolver and term loan A and 475 basis points on the term loan B adjusted quarterly based on our total leverage ratio as defined by the 2011 Credit Agreement. As of March 31, 2013, our borrowings due under the 2011 Credit Agreement totaled $1.6 billion. As of March 31, 2013 a 100 basis point increase in interest rates would increase our quarterly interest expense by approximately $1.2 million while a 100 basis point decrease in interest rates would decrease our quarterly interest expense by approximately $147 thousand due to the LIBOR floor.
Our objective in managing exposure to interest rate changes is to protect against the variability in expected future cash flows attributable to changes in the benchmark interest rate related to interest payments required under the 2011 Credit Agreement. To achieve this objective, we manage a portion of our interest rate exposure through the use of interest rate swaps and an interest rate cap. To reduce our exposure to rising interest rates and the risk that changing interest rates could have on our operations, we entered into an interest rate swap agreement and an interest rate cap agreement during June 2011. The interest rate swap agreement has a notional value of $450.0 million and is based on a 1.17% fixed rate. The interest rate cap agreement has a notional value of $255.0 million and has a strike price of 2.00%.
ITEM 4. CONTROLS AND PROCEDURES
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding
46
required disclosures. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this quarterly report on Form 10-Q. Based on that evaluation, our management, including our Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures were effective as of March 31, 2013 to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is (1) recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and (2) accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosures. There has been no change in our internal control over financial reporting as such term is defined in Rule 13a-15(f) of the Exchange Act, during the three months ended March 31, 2013 that would materially affect, or is reasonably likely to materially affect, our internal control over financial reporting.
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See Note 8 of the "Notes to Condensed Consolidated Financial Statements" in this Form 10-Q for a description of current legal proceedings, which is incorporated by reference in this Part II, Item 1.
We and our subsidiaries are parties to a number of other lawsuits arising in the ordinary course of our businesses. Most of these cases are in a preliminary stage and we are unable to predict a range of possible loss, if any. We record costs relating to these matters when a loss is probable and the amount can be reasonably estimated. The effect of the outcome of these matters on our future results of operations cannot be predicted with certainty as any such effect depends on future results of operations and the amount and timing of the resolution of such matters. While the results of litigation cannot be predicted with certainty, we believe that the final outcome of such litigation will not have a material adverse effect on our consolidated financial statements.
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Our business, financial condition, operating results and cash flows can be impacted by a number of factors, any one of which could cause actual results to vary materially from recent results or from anticipated future results. In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, "Item 1A. Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended December 31, 2012, and "Management's Discussion and Analysis of Financial Condition and Results of OperationsIndustry Overview and Outlook," which could materially affect our business, financial condition or future results. Other than as described in this report, there have been no material changes to the risk factors disclosed in Part I, "Item 1A. Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended December 31, 2012. The risks described in our Annual Report on Form 10-K are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Purchase of Equity Securities by Us and Affiliated Purchasers
The following table provides a summary of all repurchases by Walter Energy of its common stock during the three-month period ended March 31, 2013:
Period
|
Total Number of Shares Purchased(1) |
Average Price Paid per Share |
|||||
---|---|---|---|---|---|---|---|
January 1, 2013 - January 31, 2013 |
| | |||||
February 1, 2013 - February 28, 2013 |
5,839 | $ | 35.55 | ||||
March 1, 2013 - March 31, 2013 |
1,099 | $ | 30.59 | ||||
|
6,938 | ||||||
Item 4. Mine Safety Disclosures
The information concerning mine safety violations and other regulatory matters is filed as Exhibit 95 to this quarterly report on Form 10-Q pursuant to the requirements of Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of Regulation S-K (17 CFR 229.104).
Exhibit Number |
|
||
---|---|---|---|
4.1 | Indenture, dated as of March 27, 2013, by and among Walter Energy, Inc., the subsidiary guarantors named therein and Union Bank, N.A., as trustee (Incorporated by reference to Exhibit 4.1 of the Registrant's Current Report on Form 8-K (File No. 011-13711), filed on March 27, 2013). | ||
4.2 | Form of 8.500% senior note due 2021(included in Exhibit 4.1) (Incorporated by reference to Exhibit 4.2 of the Registrant's Current Report on Form 8-K (File No. 011-13711), filed on March 27, 2013). |
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Exhibit Number |
|
||
---|---|---|---|
10.1 | | Form of Restricted Stock Unit Award AgreementPerformance Vesting Award2 Year Performance Period (Incorporated by reference to Exhibit 10.11.9 of the Registrant's Annual Report on Form 10-K (File No. 011-13711) for the year ended December 31, 2012). | |
10.2 | | Form of Restricted Stock Unit Award AgreementPerformance Vesting Award3 Year Performance Period (Incorporated by reference to Exhibit 10.11.10 of the Registrant's Annual Report on Form 10-K (File No. 011-13711) for the year ended December 31, 2012). | |
10.3 | | Form of Restricted Stock Unit Award Agreement (for executives executing agreements after February 18, 2013) (Incorporated by reference to Exhibit 10.11.11 of the Registrant's Annual Report on Form 10-K (File No. 011-13711) for the year ended December 31, 2012). | |
10.4 | | Form of Non-Qualified Stock Option Agreement (for executives executing agreements after February 18, 2013) (Incorporated by reference to Exhibit 10.11.12 of the Registrant's Annual Report on Form 10-K (File No. 011-13711) for the year ended December 31, 2012). | |
10.5 | * | 2013 Executive Incentive Plan. | |
10.6 | Fourth Amendment to Credit Agreement, dated as of March 21, 2013, by and among Walter Energy, Inc., certain subsidiaries of Walter Energy, Inc., the lenders party thereto and Morgan Stanley Senior Funding, Inc., as Administrative Agent (Incorporated by reference to Exhibit 10.1 of the Registrant's Current Report on Form 8-K (File No. 011-13711), filed on March 22, 2013). | ||
31.1 | * | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002Chief Executive Officer | |
31.2 | * | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002Chief Financial Officer | |
32.1 | * | Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350Chief Executive Officer | |
32.2 | * | Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350Chief Financial Officer | |
95 | * | Mine Safety Disclosures Pursuant to Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of Regulation S-K (17 CFR 299.104) | |
101 | * | XBRL (Extensible Business Reporting Language)The following materials from Walter Energy, Inc.'s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2013, formatted in XBRL (eXtensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Statements of Comprehensive Income (iv) the Condensed Consolidated Statement of Changes in Stockholders' Equity, (v) the Condensed Consolidated Statements of Cash Flows, and (vi) Notes to Condensed Consolidated Financial Statements. |
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Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
WALTER ENERGY, INC. | ||
/s/ WALTER J. SCHELLER, III Chief Executive Officer (Principal Executive Officer) |
||
Date: May 8, 2013 |
||
/s/ WILLIAM G. HARVEY Chief Financial Officer (Principal Financial Officer) |
||
Date: May 8, 2013 |
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Exhibit 10.5
FINAL
WALTER ENERGY
2013 EXECUTIVE PERFORMANCE PROGRAM
UNDER THE EXECUTIVE INCENTIVE PLAN
I. The Program
The Walter Energy, Inc. 2013 Executive Performance Program, as it may be amended from time to time (the Program), under the Walter Energy, Inc. Executive Incentive Plan, as it may be amended from time to time (the Plan), is intended to stimulate and reinforce executive actions that support and assure the attainment of key corporate objectives. The Program facilitates these objectives by providing key employees the opportunity to earn additional cash compensation if the Company and its Subsidiaries attain their financial and operating objectives during the 2013 Plan Year and the Participant (as defined below) attains required individual performance levels. The terms and provisions of the Plan are hereby incorporated herein by reference. In the event of a conflict between any term or provision contained herein and a term or provision of the Plan, the applicable terms and provisions of the Plan will govern and prevail. All capitalized terms used but not defined herein shall have the meaning ascribed to such term in the Plan.
II. Definitions
1. Base Salary means a Participants aggregate annual base salary (exclusive of any special stipends, interim payments, commissions, overrides, and any incentive and other cash and non-cash payments) earned in respect of the 2013 Plan Year.
2. Committee means the Compensation and Human Resources Committee of the Board, as it is constituted from time to time.
3. Consolidated EBITDA means total earnings before interest expense, interest income, income taxes, depreciation, depletion and amortization for Walter Energy Inc.
4. Employee means an Employee of an Operating Unit.
5. Incentive Fund means the fund created in accordance with Section VII of the Program.
6. Operating Unit means a wholly owned subsidiary of the Company that has been declared by the Committee to be eligible to participate in the Plan and the Program.
7. Participant means an Employee who has been selected to participate in the Program in accordance with and subject to the terms and conditions set forth herein.
8. Peer Group means a group of companies that are selected by the Committee for comparison purposes based on set of criteria (e.g., being a direct competitor; the same or
similar industry; same or similar size or annual revenues to one or more Subsidiaries or the Company).
9. Performance Goal means the performance goals for the 2013 Plan Year, as more fully described in Section V, and the measures that are designated for all Participants or individual Participants so that, if each is attained at 100%, the Participant could receive the Target Incentive Opportunity for such Participant.
10. Target Incentive Opportunity means additional cash compensation, expressed as a percentage of Base Salary, which may be recommended as an incentive award if all targets are attained at 100%. The actual amount of the award payable hereunder could increase or decrease as more fully described in Section VIII, subject to the terms of the Plan and the Program.
III. Administration
1. The Program shall be administered by the Committee.
2. The Committee shall have sole and complete authority to make awards under the Program from funds authorized by the Committee in accordance with the terms of the Plan and the Program and to adopt, alter and repeal such administrative rules, guidelines and practices governing the operation of the Program, as it shall deem advisable from time to time and to interpret the terms and provisions of the Program.
A majority of the Committee shall constitute a quorum, and the acts of a majority of the members present at any meeting at which a quorum is present, or acts approved in writing by a majority of the Committee without a meeting, shall be the acts of the Committee.
3. Nothing in the Plan, the Program or any of the related documents and no representations by the Company, shall be construed as creating a contract, oral or written, that guarantees employment of an individual for any period of time, nor is there created any entitlement to receive an incentive payment except as determined by the Committee. The decisions and determinations of the Committee shall be final, conclusive and binding on all Participants.
IV. Eligible Participants
1. The following Employees of the Company and its Subsidiaries are eligible to participate in the Program: Employees who hold positions that are equal to or greater than salary grade 9, or the equivalent, under the Companys job evaluation program.
2. Participants in the Program may not take part in any other cash incentive or production bonus plan that is sponsored by the Company or any of its Subsidiaries.
3. Participation in the Companys Employee Stock Purchase Plan is required of all eligible Participants in the Plan and Program to receive an incentive award.
V. Performance Goals
1. Financial Performance Goals 60% of a Participants incentive opportunity.
From time to time in its discretion with respect to a Plan Year, the Committee will establish one or more financial performance goals based on the annual business plan, improvement over the former year, a Peer Group comparison, or such other criteria as it may determine in its discretion. The financial performance goals may include one or more measures, such as: earnings before taxes (EBT); net income (NI); earnings per share (EPS); operating income (OI); return on net assets (RONA), earnings before interest, taxes, depreciation and amortization (EBITDA); earnings before interest and taxes (EBIT); and/or pricing, production volume, production capacity, cost per ton, etc. that reflect the combined results of one or more of the Companys Subsidiaries. If the Committee designates more than one target, it shall assign relative weights to each target so that the sum of all weighting factors is to equal 1.0.
For the 2013 Plan Year, as more fully described in the 2013 Performance Metrics and Design Parameters attached hereto (the Parameters), the Committee has designated Consolidated EBITDA, production tons and cost per ton as the financial performance goals, with each such goal representing 20% of the weighting for all Participants.
The Committee will have the sole power and authority to review and adjust the financial performance goals during the 2013 Plan Year due to unanticipated events, including, but not limited to, windfall gains, disposal of significant assets, catastrophes and other nonrecurring events.
2. Safety Performance Goal 20% of a Participants incentive opportunity.
As soon as practicable at or near the beginning of the 2013 Plan Year, the Committee will establish one or more safety performance goals for each Operating Unit based on each Operating Units safety performance record. Safety performance goals may include, but are not limited to, lost time accident (LTA) rate, incident rate and citations issued. If there is more than one goal, relative weights will be assigned to each goal so that the sum of all weighting factors is equal to 1.0. The safety performance goals applicable for the 2013 Plan Year are more fully described in the Parameters.
3. Individual Goals 20% of a Participants incentive opportunity.
As soon as practicable at or near the beginning of the 2013 Plan Year, one or more individual goals will be established for each Participant by the Participants manager in
consultation with the Participant. If there is more than one goal, the manager will assign relative weights to each goal so that the sum of all weighting factors is equal to 1.0. The goals will be reviewed and approved by the next level of executive management, and communicated directly to the Participant.
Individual Goals will focus on key actions and accomplishments by the Participant that support the Companys strategic objectives. The goals, in order to be effective, must be specific and measurable, to the greatest extent possible. Examples of individual goals will relate to operation excellence, growth of the Company and employee development.
A Participants manager shall have the authority, with the written approval of the next level of executive management, to review and adjust the individual goals during the 2013 Plan Year because of unanticipated events, including, but not limited to, windfall gains, disposal of significant assets, catastrophes and other nonrecurring events.
VI. Target Incentive Opportunity
1. Each Participant in the Program will have a Target Incentive Opportunity, as determined by the Committee or in accordance with the Companys compensation policies, as of the beginning of the 2013 Plan Year.
2. A Target Incentive Opportunity represents the amount of additional cash compensation that will be recommended for payment if all of the financial, safety and individual performance targets are attained at 100%, subject to the other terms and conditions contained herein and in the Parameters.
3. Actual payments to a Participant may be increased or decreased from the Participants Target Incentive Opportunity depending on actual performance compared to performance goals and final determination by the Committee, but in no event will a Participants Target Incentive Opportunity exceed the maximum award permitted under the Plan. Subject to the terms of the Plan, the maximum award under the Program will be a percentage of Base Salary as determined by Company compensation policies.
VII. Incentive Fund
At the beginning of each Plan Year, subject to the terms of the Plan, the Company will establish an Incentive Fund derived from the aggregate of the Base Salaries of the Participants times their Target Incentive Opportunity. During the course of the Plan Year, the Company may adjust the size of the Incentive Fund to reflect projected year-end performance, Participant changes and resulting year-end incentive payments; provided, however, that in no event may the Incentive Fund exceed the Award Pool.
VIII. Incentive Awards
1. A Participants incentive award under the Program will be calculated by the sum of the following components:
Part A - Financial performance to financial performance goals
Part B - Safety performance to safety performance goals
Part C - Individual performance to individual goals
2. Minimum Individual Performance Required
Notwithstanding anything herein to the contrary, a Participant who has an overall unsatisfactory performance rating under the Companys performance appraisal program is not eligible for an incentive payment hereunder unless and until such Participants performance improves to meet acceptable standards. A Participant who is not rated due to being new in the position is eligible for an incentive payment as long as the Participant is progressing satisfactorily towards expected standards and is meeting the other requirements of the Plan and Program.
3. Incentive awards hereunder may not be paid until the completion of the Companys audited financial statements corresponding to the 2013 Plan Year and the approval of the Companys Audit Committee has been received.
4. The calculated awards will be recommended for payment to the Committee. The Committee may use discretion to increase or decrease the size of the award; provided that no award may exceed the maximum award as provided in the Plan; and provided further, that the aggregate total of all awards granted in a Plan Year may not exceed the Award Pool.
IX. Timing and Method of Payment
1. Awards hereunder, if any, will be paid in cash, less required withholdings, within 75 days following the end of the 2013 Plan Year.
2. Pro rata payments:
a. A Participant must be an Employee at the time the bonus is paid in order to receive an incentive payment under the Program. A Participant whose employment terminates for any reason before the end of the 2013 Plan Year will not be eligible for an incentive award for such Plan Year unless the termination was the result of death, Disability (as defined under the Companys disability plan(s)) or Retirement (as defined below) under a Company sponsored retirement plan, in which case, a payment based on the portion of the 2013 Plan Year worked
applied to target (or less than target if actual performance is below target in any area) may be recommended to the Committee, provided the Participant worked at least three months during the 2013 Plan Year. Retirement is defined as the termination of the Participants employment by the Participant either (a) on or after the date on which the Participant attains the age of 60, or, (b) on a date on which the sum of the Participants age and completed years of employment with the Company and its Subsidiaries is at least eighty (80).
b. Participants who are hired following the commencement of the 2013 Plan Year, or are transferred or promoted into an incentive eligible position may be recommended for a payment hereunder, based on their Target Incentive Opportunity and their time in the eligible position, as long as they have worked in that position at least three months during the 2013 Plan Year.
c. Participants who are promoted or transferred from one incentive position to another incentive position will receive a payment hereunder based on their Target Incentive Opportunity, the period of time they were in each position and their Base Salary. Any such payment from Part A- Financial performance and Part B- Safety will be measured and apportioned at the end of the 2013 Plan Year. Individual Goals must be set and measured for the period in each position.
3. Notwithstanding anything herein to the contrary, a Participant who is eligible for a payment under the Program following termination of employment and under the terms of an employment, severance, or change in control agreement will be paid at a time and frequency specified in such employment, severance, or change in control agreement. If the Participant is a Specified Employee as defined under Section 409A of the Code, the payment shall be deferred until the first business day after the date that is six (6) months after the termination date in order to comply with the Code, to the extent applicable.
4. Clawbacks: If any of the Companys financial statements are required to be restated due to errors, omissions, fraud, or misconduct, the Committee may, in its sole discretion but acting in good faith, direct that the Company recover all or a portion of any incentive award hereunder or any past or future compensation from any Participant with respect to any fiscal year of the Company for which the financial results are negatively affected by such restatement. For purposes of this paragraph, errors, omissions, fraud, or misconduct may include and is not limited to circumstances where the Company has been required to prepare an accounting restatement due to material noncompliance with any financial reporting requirement, as enforced by the United States Securities and Exchange Commission, and the Committee has determined in its sole discretion that a Participant had knowledge of the material noncompliance or the circumstances that gave rise to such noncompliance and failed to take reasonable steps to bring it to the attention of the appropriate individuals within the Company, or the Participant personally and knowingly engaged in practices which materially contributed to the circumstances that enabled a material noncompliance to occur.
X. Effective Date and Duration
1. The Program shall be effective as of January 1, 2013.
2. The Committee may discontinue the Program, in whole or in part, at any time, or may, from time to time, amend the Program in any respect that the Committee may deem to be advisable.
2013 Performance Metrics and Design Parameters
Mechanics
1. Each Participant will have a Target Incentive Opportunity expressed as a percentage of Base Salary.
2. The Program will use a balanced scorecard of goals including financial, safety and individual goals.
3. All Participants will have a shared corporate financial goal Consolidated EBITDA. In order for any payment to be made under the Program, a threshold Consolidated EBITDA target must be met.
4. Each goal will have an assigned weight, with all weights adding to 100%.
5. Each goal will have assigned minimum, target and maximum performance levels, established to ensure both the appropriate degree of stretch and probability of achievement.
6. Award payouts will range from 50% of the Target Incentive Opportunity for minimum performance, to 100% of the Target Incentive Opportunity for performance at target, to 200% of the Target Incentive Opportunity for maximum performance.
7. Performance against each goal will be assessed, weighted and added together to determine the award for each Participant at year-end.
Performance Metrics
1. Financial (60% Weighting)
a. Consolidated EBITDA: 20% weighting for all Participants.
b. Production Tons: 20% weighting for all Participants.
i. Corporate officers and staff: Metric will be the sum of all business units.
ii. Business Unit executives and staff: Metric will be the sum of mines in the business unit.
iii. Mine managers and staff: Metric will be mine specific.
c. Cash cost per Ton: 20% weighting for all Participants.
i. Corporate officers and staff: Metric will be a weighted based on operating income of all business units.
ii. Business Unit executives and staff: Metric will be a weighted based on operating income of mines in the business unit.
iii. Mine managers and staff: Metric will be mine specific.
2. Safety (20% Weighting)
a. Based on reportable incident rates for all Participants.
i. Corporate officers and staff: Metric will be a weighted based on operating income of all business units.
ii. Business Unit executives and staff: Metric will be a weighted based on operating income of mines in the business unit.
iii. Mine managers and staff: Metric will be mine specific.
b. In the event of a fatality, all Participants will automatically lose one-fourth of the safety component incentive opportunity, and the business unit in which the fatality occurred will lose all of the safety component incentive opportunity.
3. Individual Goals (20% Weighting)
a. All Participants will have documented individual goals, developed in conjunction with their manager.
b. Goals must be specific, measureable and tied directly to furthering the Companys overall business objectives.
Final Awards
After initial awards are determined through application of the goal weights and performance against targets, the Committee will have discretion to adjust the initial awards to take into account relevant factors that affected performance during the year, i.e. key external factors, performance versus peers, etc.
Awards will be paid annually in cash, less required withholdings, within 75 days of the close of the 2013 Plan Year.
Walter Energy, Inc.
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
CERTIFICATION OF PERIODIC REPORT
I, Walter J. Scheller, III, certify that:
Date: May 8, 2013
|
/s/ WALTER J. SCHELLER, III Chief Executive Officer (Principal Executive Officer) |
Walter Energy, Inc.
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
CERTIFICATION OF PERIODIC REPORT
I, William G. Harvey, certify that:
Date: May 8, 2013
|
/s/ WILLIAM G. HARVEY Chief Financial Officer (Principal Financial Officer) |
Walter Energy, Inc.
Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
18 U.S.C. Section 1350
In connection with the accompanying Quarterly Report of Walter Energy, Inc. (the "Company") on Form 10-Q for the quarterly period ended March 31, 2013 (the "Report"), I, Walter J. Scheller, III, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
Date: May 8, 2013
|
/s/ WALTER J. SCHELLER, III Chief Executive Officer (Principal Executive Officer) |
Walter Energy, Inc.
Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
18 U.S.C. Section 1350
In connection with the accompanying Quarterly Report of Walter Energy, Inc. (the "Company") on Form 10-Q for the quarterly period ended March 31, 2013 (the "Report"), I, William G. Harvey, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
Date: May 8, 2013
|
/s/ WILLIAM G. HARVEY Chief Financial Officer (Principal Financial Officer) |
Exhibit 95
Item 5. Other Information
Mine Safety and Health Administration Safety Data
The Company is committed to the safety of its employees and to achieving a goal of providing a workplace that is incident free. In achieving this goal the Company has in place health and safety programs that include regulatory-based training, accident prevention, workplace inspection, emergency preparedness response, accident investigations and program auditing. These programs are designed to comply with regulatory mining-related coking coal safety and environmental standards. Additionally, the programs provide a basis for promoting a best in industry safety practice.
The operation of our mines is subject to regulation by the Mine Safety and Health Administration (MSHA) under the Federal Mine Safety and Health Act of 1977 (the Mine Act). MSHA inspects our mines on a continual basis and issues various citations and orders when it believes a violation has occurred under the Mine Act. As required by Section 1503 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, each operator of a coal or other mine is required to include certain mine safety results in its periodic reports filed with the Securities and Exchange Commission. Within this disclosure, we present information regarding certain mining safety and health citations which MSHA has issued with respect to our mining operations. In evaluating this information, consideration should be given to factors such as: (i) the number of citations and orders will vary depending on the size of the coal mine, (ii) the number of citations issued will vary from inspector to inspector and mine to mine, and (iii) citations and orders can be contested and appealed and, in that process, are sometimes dismissed and remaining citations are often reduced in severity and amount.
During the quarter ended March 31, 2013 none of the Companys mining complexes received written notice from MSHA of (i) a pattern of violations of mandatory health or safety standards that are of such nature as could have significantly and substantially contributed to the cause and effect of coal or other mine health or safety hazards under section 104(e) of the Mine Act or (ii) the potential to have such a pattern.
The table below presents the total number of specific citations and orders issued by MSHA to Walter Energy, Inc. and its subsidiaries, together with the total dollar value of the proposed MSHA civil penalty assessments received during the quarter ended March 31, 2013. The second table presents legal actions pending before the Federal Mine Safety and Health Review Commission for each of our mining complexes that had pending legal actions during the quarter ended March 31, 2013.
Mining Complex(1) (4) |
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Section |
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Section |
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Section |
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Section |
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Section |
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Proposed |
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Fatalities |
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JWR No. 4 |
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45 |
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4 |
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97.1 |
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JWR No. 5 |
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JWR No. 3 |
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JWR No. 7 |
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57 |
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2 |
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108.5 |
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JWR Central Supply |
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JWR Central Shop |
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JWR North River |
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9 |
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216.7 |
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Taft Reid School |
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1 |
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Taft Choctaw |
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1 |
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TRI East Brookwood |
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TRI Highway 59 |
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TRI Swanns Crossing |
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Atlantic Leaseco King Coal 1 Mine |
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Atlantic Leaseco King Coal 1 Prep Plant |
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1.5 |
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Atlantic Leaseco Black Pearl |
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Atlantic Leaseco Cowen Loadout |
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Atlantic Leaseco Crooked Run |
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Maple Coal Maple Eagle No. 1 |
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7 |
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6.2 |
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Maple Coal Maple Prep Plant |
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1 |
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Maple Coal Huffman Sycamore SM |
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(1) MSHA assigns an identification number to each coal mine and may or may not assign separate identification numbers to related facilities such as preparation plants. We are providing the information in the table by mining complex rather than MSHA identification number because we believe that this presentation is more useful to investors. For descriptions of each of these mining operations, please refer to the descriptions under Item 1. Description of Business in Part 1 of our Annual Report on Form-10K for the fiscal year ended December 31, 2012. Idle facilities are not included in the table above unless they received a citation, order or assessment by MSHA during the current annual reporting period or are subject to pending legal actions.
(2) Amounts listed under this heading include proposed assessments received from MSHA in the current annual reporting period for alleged violations, regardless of the issuance date of the related citation or order.
(3) On December 5, 2011, an underground miner at Maple Eagle No. 1 Mine suffered an apparent heart attack while at work. The miner was taken to a local hospital where he died a few days later. MSHA has established policies and procedures for determining whether a fatality is unrelated to mining activity, such as homicides, suicides, and deaths by natural causes (commonly referred to as non-chargeable to the mining industry.) The SECs final rules implementing Section 1503 of the Dodd-Frank Wall Street Reform and Consumer Protection Act specify that disclosure is required of all fatalities, unless the fatality is determined to be non-chargeable. SEC rules specify that until MSHAs fatality review committee has formally declared a fatality to be non-chargeable, it must be disclosed, and Walter Energy disclosed the fatality in its 2011 10-K.. MSHA regulations require mine operators to report to MSHA all fatalities that occur at a mine. MSHA initiated a Non-Chargeable Accident Investigation into the fatality and forwarded its report to the fatality review committee. On January 9, 2013, the Fatality Review Committee issued its decision on chargeability. Based on their findings and the results of MSHAs investigation, the Committee members concluded that the miner died from natural causes and that his death should not be charged to the mining industry. As a result, it was not subject to the disclosure requirements of the SECs final rules implementing Section 1503 of the Dodd-Frank Wall Street Reform and Consumer Protection Act.
(4) The table includes references to specific sections of the Mine Act as follows:
· Section 104(a) Citations include citations for health or safety standards that could significantly and substantially contribute to serious injury if left unabated.
· Section 104(b) Orders represent failures to abate a citation under 104(a) within the period of time prescribed by MSHA and that the period of time prescribed for the abatement should not be further extended. This results in an order of immediate withdrawal from the area of the mine affected by the condition until MSHA determines that the violation has been abated.
· Section 104(d) Citations and Orders are for unwarrantable failure to comply with mandatory health and safety standards where such violation is of such a nature as could significantly or substantially contribute to the cause and effect of a coal or other mine safety or health hazard.
· Section 110(b)(2) Violations are for flagrant violations.
· Section 107(a) Orders are for situations in which MSHA determined an imminent danger existed.
Mining Complex Legal Actions(1) |
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Pending as of |
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Initiated |
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Resolved |
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JWR No. 3 |
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29 CFR Part 2700, Subpart C |
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1 |
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JWR No. 4 |
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29 CFR Part 2700, Subpart B |
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9 |
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2 |
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1 |
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29 CFR Part 2700, Subpart C |
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34 |
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3 |
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4 |
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JWR No. 5 |
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29 CFR Part 2700, Subpart C |
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1 |
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JWR No. 7 |
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29 CFR Part 2700, Subpart B |
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11 |
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2 |
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29 CFR Part 2700, Subpart C |
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18 |
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3 |
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7 |
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29 CFR Part 2700, Subpart H |
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3 |
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JWR North River |
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29 CFR Part 2700, Subpart B |
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29 CFR Part 2700, Subpart C |
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2 |
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1 |
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4 |
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Taft Reid School |
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29 CFR Part 2700, Subpart C |
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1 |
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TRI East Brookwood |
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29 CFR Part 2700, Subpart C |
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1 |
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TRI Swanns Crossing |
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29 CFR Part 2700, Subpart C |
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4 |
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Atlantic Leaseco King Coal 1 Mine |
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29 CFR Part 2700, Subpart C |
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Atlantic Leaseco Black Pearl |
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29 CFR Part 2700, Subpart C |
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13 |
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Maple Coal Maple Eagle No. 1 |
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29 CFR Part 2700, Subpart B |
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9 |
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6 |
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29 CFR Part 2700, Subpart C |
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7 |
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2 |
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15 |
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Maple Coal Maple Prep Plant |
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29 CFR Part 2700, Subpart C |
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1 |
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Maple Coal Huffman Sycamore SM |
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29 CFR Part 2700, Subpart C |
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(1) Effective January 27, 2011, SEC adopted amendments to its rules to implement Section 1503 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the final rule). The final rule modified previous reporting requirements and requires that the total number of legal actions pending before the Federal Mine Safety and Health Review Commission (FMSHRC) as of the last day of the time period covered by the report be categorized according to type of proceeding, in accordance with the categories established in the Procedural Rules of FMSHRC. SEC rules require that six different categories of pending legal actions be disclosed. Categories for which there is no pending litigation for the respective mine are not listed in the table. The types of proceedings are listed as follows:
· 29 CFR Part 2700, Subpart B These legal actions include proceedings initiated under FMSHRC Procedural Rule 29 CFR Part 2700, Subpart B such as contests of citations and orders filed prior to receipt of a proposed penalty assessment from MSHA, contests related to orders for which penalties are not assessed (such as imminent danger orders under Section 107 of the Mine Act), and emergency response plan dispute proceedings.
· 29 CFR Part 2700, Subpart C These legal actions include proceedings initiated under FMSHRC Procedural Rule 29 CFR Part 2700, Subpart C and are contests of citations and orders after receipt of proposed penalties.
· 29 CFR Part 2700, Subpart D These legal actions include proceedings initiated under FMSHRC Procedural Rule 29 CFR Part 2700, Subpart D and are complaints for compensation, which are cases under section 111 of the Mine Act.
· 29 CFR Part 2700, Subpart E These legal actions include proceedings initiated under FMSHRC Procedural Rule 29 CFR Part 2700, Subpart E and are complaints of discharge, discrimination or interference and temporary reinstatement under section 105 of the Mine Act.
· 29 CFR Part 2700, Subpart F These legal actions include proceedings initiated under FMSHRC Procedural Rule 29 CFR Part 2700, Subpart F such as applications for temporary relief under section 105(b)(2) of the Mine Act from any modification or termination of any order issued thereunder, or from any order issued under section 104 of the Mine Act (other than citations issued under section 104(a) or (f) of the Mine Act).
· 29 CFR Part 2700, Subpart H These legal actions include proceedings initiated under FMSHRC Procedural Rule 29 CFR Part 2700, Subpart H and are appeals of judges decisions or orders to FMSHRC, including petitions for discretionary review and review by FMSHRC on its own motion.
Commitments and Contingencies (Details)
|
1 Months Ended | 6 Months Ended | 3 Months Ended | 0 Months Ended | 1 Months Ended | 3 Months Ended | 1 Months Ended | 3 Months Ended | |||
---|---|---|---|---|---|---|---|---|---|---|---|
Jun. 30, 2010
|
Jun. 30, 2012
|
Mar. 31, 2013
USD ($)
|
Mar. 31, 2013
Environmental Matters
Walter Coke, Inc.
item
|
Mar. 05, 2013
Environmental Matters
Jim Walter Resources, Inc
CAD
|
Dec. 31, 2011
Environmental Matters
Jim Walter Resources, Inc
USD ($)
|
Nov. 30, 2011
Environmental Matters
Jim Walter Resources, Inc
USD ($)
|
Mar. 31, 2013
Environmental Matters
Jim Walter Resources, Inc
USD ($)
|
May 30, 2012
Securities Class Actions and Shareholder Derivative Actions
item
|
Jan. 31, 2012
Securities Class Actions and Shareholder Derivative Actions
item
|
Mar. 31, 2013
Securities Class Actions and Shareholder Derivative Actions
item
|
|
Commitments and contingencies | |||||||||||
Extension period to submit proposed final order | 90 days | ||||||||||
Comment letter period | 30 days | 30 days | |||||||||
Accruals for unrecognized tax benefits related to disposition | $ 38,000,000 | ||||||||||
Number of properties that the entity has agreed to remediate | 23 | ||||||||||
Litigation settlement fine | 145,200 | ||||||||||
Penalty sought | 100,000 | 60,000 | |||||||||
Remediation cost incurred | $ 5,000,000 | ||||||||||
Number of executive directors as defendants | 3 | ||||||||||
Number of actions | 2 | ||||||||||
Number of complaints | 3 |
Supplemental Guarantor and Non-Guarantor Financial Information (Details) (USD $)
In Millions, unless otherwise specified |
0 Months Ended | 0 Months Ended | ||
---|---|---|---|---|
Nov. 21, 2012
2020 Notes
|
Mar. 31, 2013
2020 Notes
|
Mar. 27, 2013
2021 Notes
|
Mar. 31, 2013
2021 Notes
|
|
Debt instrument | ||||
Amount borrowed | $ 500.0 | $ 450.0 | ||
Interest rate (as a percent) | 9.875% | 9.875% | 8.50% | 8.50% |
Fair Value of Financial Instruments (Details 2) (USD $)
In Millions, unless otherwise specified |
Mar. 31, 2013
|
Dec. 31, 2012
|
---|---|---|
Carrying amount, cost | 2011 term loan A
|
||
Debt | ||
Debt | $ 656.6 | $ 757.0 |
Carrying amount, cost | 2011 term loan B
|
||
Debt | ||
Debt | 978.2 | 1,128.0 |
Carrying amount, cost | 2020 Notes
|
||
Debt | ||
Debt | 496.6 | 496.5 |
Carrying amount, cost | Revolving Credit Facility
|
||
Debt | ||
Debt | 0 | 0 |
Carrying amount, cost | 2021 Notes
|
||
Debt | ||
Debt | 450.0 | |
Fair value | 2011 term loan A
|
||
Debt | ||
Debt | 657.0 | |
Fair value | 2011 term loan B
|
||
Debt | ||
Debt | 983.3 | |
Fair value | 2020 Notes
|
||
Debt | ||
Debt | 543.1 | |
Fair value | 2021 Notes
|
||
Debt | ||
Debt | $ 461.2 |
Restructuring (Details) (Willow Creek mine in the Canadian and U.K. operations, USD $)
In Millions, unless otherwise specified |
3 Months Ended |
---|---|
Mar. 31, 2013
|
|
Restructuring | |
Restructuring charges | $ 7.4 |
Employee severance
|
|
Restructuring | |
Number of employees terminated | 250 |
Restructuring charges | 4.3 |
Contract termination
|
|
Restructuring | |
Restructuring charges | $ 3.0 |
Pension and Other Postretirement Benefits (Tables)
|
3 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Mar. 31, 2013
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Pension and Other Postretirement Benefits | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Components of net periodic benefit costs | The components of net periodic benefit cost are as follows (in thousands):
|
Pension and Other Postretirement Benefits (Details) (USD $)
In Thousands, unless otherwise specified |
3 Months Ended | |
---|---|---|
Mar. 31, 2013
|
Mar. 31, 2012
|
|
Pension Benefits
|
||
Components of net periodic benefit cost: | ||
Service cost | $ 1,766 | $ 1,498 |
Interest cost | 3,070 | 3,129 |
Expected return on plan assets | (4,235) | (4,031) |
Amortization of prior service cost | 66 | 64 |
Amortization of net actuarial loss | 2,434 | 2,313 |
Net periodic benefit cost | 3,101 | 2,973 |
Other Postretirement Benefits
|
||
Components of net periodic benefit cost: | ||
Service cost | 2,486 | 2,018 |
Interest cost | 7,198 | 7,253 |
Amortization of prior service cost | 307 | 261 |
Amortization of net actuarial loss | 4,734 | 3,681 |
Net periodic benefit cost | $ 14,725 | $ 13,213 |