Arch's Profits Slip below Consensus - Analyst Blog

Coal producer Arch Coal Inc. (ACI) has reported net adjusted earnings of 35 cents per share for the third quarter 2010, which is below the Zacks Consensus Estimate of 37 cents.

GAAP net earnings during the quarter were 29 cents per share versus 16 cents in the year ago quarter. GAAP earnings in the reported quarter included pre-tax charges related to non-cash amortization of coal supply agreements acquired in the Jacobs Ranch transaction as well as to non-recurring debt extinguishment costs on the redemption of $500 million of Arch Western Resources senior notes due 2013.

Total Revenue

Arch's total revenue of $874.7 million in the quarter was $62.7 million above the Zacks Consensus Estimate of $812.0 million. Revenue was also above the year-ago revenue of $615.0 million, reflecting a growth of 42%, driven by favorable coal market conditions and the inclusion of Jacobs Ranch volume.

Operational Update

During the reported quarter, Arch sold 43.7 million tons of coal versus 29.1 million tons in the year-ago quarter. Given some rigorous cost-controls implemented during the quarter, the cash cost-per-ton of coal declined to $13.70 from $15.75 in the year-ago quarter, reflecting a cost benefit of 13% year over year.

Consolidated operating margin per ton expanded 10% sequentially in the quarter of 2010, resulting from improved steam coal customer demand and continued effective cost controls. Margin growth in the quarter was greatly helped by the Powder River Basin, where operating margins improved nearly 40% sequentially, reaching their highest level since mid-2006.

Adjusted earnings before interest, taxes, depreciation, depletion and amortization (EBITDA) increased 67% to reach $201 million in the reported quarter.

As a result of the effective cost control programs, Arch's operating profits more than doubled to $98.3 million from $48.3 million in same period last year.

Financial Update

Cash flow from operations totaled $457 million for the nine months ended September 30, 2010, an increase of 85% over the prior-year period. Capital expenditures at quarter-end were $222 million. Also, Arch reached a record free cash flow level of $235 million as of September 30, 2010.

During the quarter, Arch used its free cash flow to repay short-term borrowings and reduce its debt-to-total-capital ratio to 43%. As of September 30, 2010, the company had $954 million of available liquidity comprising $64 million of cash on hand and $890 million under its short-term borrowing facilities. Long-term debt for the company was slightly below the year-end 2009 levels at $1.538 billion.

Guidance

Based on better-than-expected synergies at the Powder River Basin and improved rail performance, Arch Coal raised the sales expectations for operations it controls to a range of 155–158 million tons for 2010. The guidance includes expected metallurgical coal sales at around 6 million tons.

Arch raised its adjusted EBITDA guidance to a range of $750−$790 million, from the previous range of $718−$790 million. Depreciation, depletion and amortization guidance is maintained at $372−$376 million.

Capital expenditure of the company is expected to remain in the range of $315−$335 million.

Arch Coal presently expects its 2010 earnings to range between $1.25 and $1.40 per share. On a GAAP basis, the company's EPS guidance, including amortization of coal supply agreements and early debt extinguishment costs, is between $1.09 and $1.23.

Our View

We believe the overall coal market trends are improving gradually and the company is presently well placed to enjoy the benefits. As a major operator in the Powder River Basin, Arch Coal is poised to benefit from the reduction in stockpiles in the region. Also, the company will gain from improving demand for seaborne coal, particularly from the Asia-Pacific market.

Based in St. Louis, Missouri, Arch Coal engages in the production and sale of steam and metallurgical coal. The company also ships coal to domestic and international steel manufacturers as well as international power producers.