2005 Financial Review
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
Discontinued Operations
| Years Ended December 31, | ||||
| (In millions) | 2005 | 2004 | 2003 | |
| Gain (loss) on sale of | ||||
| BAX Global (costs associated with the sale) | $ | (2.8) | - | - |
| Timber | - | 20.7 | 4.8 | |
| Gold | - | (0.9) | - | |
| Natural Gas | - | - | 56.2 | |
| Coal | - | 5.0 | - | |
| Results from operations | ||||
| BAX Global | 86.8 | 49.5 | (0.4) | |
| Timber | - | (0.5) | (0.2) | |
| Gold | - | (1.2) | (4.1) | |
| Natural Gas | - | - | 11.2 | |
| Adjustments to contingent liabilities of former operations | ||||
| Litigation settlement gain | 15.1 | - | - | |
| Health Benefit Act liabilities | 2.3 | 3.2 | (31.3) | |
| Withdrawal liabilities | 6.1 | 15.4 | (17.0) | |
| Reclamation liabilities | (6.2) | (0.1) | (3.2) | |
| Workers’ compensation liabilities | 0.4 | (4.9) | 0.2 | |
| Recovery of environmental costs | - | - | 5.3 | |
| Other | 0.1 | (3.3) | (2.7) | |
| Income from discontinued operation before income taxes | 101.8 | 82.9 | 18.8 | |
| Income tax (expense) benefit | 3.7 | (32.9) | (27.3) | |
| Income (loss) from discontinued operations | $ | 105.5 | 50.0 | (8.5) |
The operating results of BAX Global and former natural resource operations have been reclassified to discontinued operations for all periods presented.
BAX Global
In November 2005, the Company’s Board of Directors approved the sale of BAX Global, a wholly owned freight transportation subsidiary, and on January 31, 2006, the Company sold BAX Global for $1.1 billion in cash. See note 5 to the consolidated financial statements. Accordingly, BAX Global’s results of operations have been reported herein as discontinued operations for all periods presented. BAX Global’s assets and liabilities have been classified as held for sale on the Company’s consolidated balance sheet for 2005.
| Years Ended December 31, | % change | ||||||
| (In millions) | 2005 | 2004 | 2003 | 2005 | 2004 | ||
| Revenues | $ | 2,899.4 | 2,440.6 | 1,999.2 | 19 | 22 | |
| Operating profit | $ | 91.4 | 52.6 | 2.6 | 74 | 200+ | |
| Interest and other nonoperating expense, net | (4.6) | (3.1) | (3.0) | 48 | 3 | ||
| Pretax income (loss) | $ | 86.8 | 49.5 | (0.4) | 75 | NM | |
BAX Global’s revenues increased 19% in 2005 compared to 2004 due to improved volumes in all regions and in particular Asia-Pacific. BAX Global’s operating profit in 2005 was $38.8 million higher compared to 2004 primarily due to an increase in air export volumes and improved margins in Asia-Pacific. In addition, depreciation and amortization of BAX Global’s long-lived assets ceased during November 2005 as a result of the assets being classified as held for sale, which reduced 2005 expense by $4.9 million. The increase in 2005 operating profit was partially offset by a $2.9 million charge covering ancillary costs which management concluded could not be billed back to customers.
BAX Global 2004 revenues were higher than 2003 as a result of the strengthening of economies in the Americas region, improving economic conditions and new business in several Asia-Pacific countries and the favorable effect of currency changes in Europe. Operating profit in 2004 was $50 million above 2003 as a result of higher volumes from the Intra America network and Asia-Pacific primarily associated with the high technology industry. In addition, the 2004 operating profit benefited from charters under contract for the U.S. government and other charter activity for both government and commercial customers. Operating profit in 2004 includes a $5.0 million impairment charge to cover the abandonment of capitalized transportation logistics software.
Former Natural Resource Operations
The Company sold a portion of its timber business for $5.4 million in cash in 2003 and recognized a $4.8 million pretax gain. In 2004, the Company received an additional $33.7 million for the remaining portion of its timber business. After deducting the book value of related assets and the payment of $6.2 million in 2004 to purchase equipment formerly leased, the Company recognized a $20.7 million pretax gain in 2004.
In February 2004, the Company sold its gold operations for approximately $1.1 million in cash plus the assumption of liabilities and recognized a $0.9 million loss.
In August 2003, the Company sold its natural gas business and received $81.2 million in cash and recognized a $56.2 million gain.
Adjustments to Contingent Liabilities of Former Operations
Federal Black Lung Excise Tax. In 1999, the U.S. District Court of the Eastern District of Virginia entered a final judgment in favor of the Company, ruling that the Federal Black Lung Excise Tax (“FBLET”) is unconstitutional as applied to export coal sales. Through December 31, 2004, the Company had received refunds including interest of $27.2 million, including $2.8 million received in 2003. In December 2005, the Company reached a final settlement agreement related to all claims for FBLET refunds and recorded a pretax gain of $15.1 million. The Company has received payments covering this refund during the first quarter of 2006.
Health Benefit Act Liabilities. The Company has obligations under the Coal Industry Retiree Health Benefit Act of 1992 (the “Health Benefit Act”), as described in note 4 to the consolidated financial statements. The estimated liability is reduced each year as payments are made. In addition, the Company reduced the estimated liability by $2.3 million in 2005 and $3.2 million in 2004 and increased the estimated liability by $31.3 million in 2003 to reflect changes in the estimates of the undiscounted liability. This estimated liability will be adjusted in future periods as assumptions change.
The $2.3 million reduction in the liability in 2005 was primarily related to a one-year extension of funding by the AML of unassigned benefits and a lower-than-projected per-beneficiary health care premium rate, partially offset by a higher number of unassigned beneficiaries attributed to the Company.
The $3.2 million reduction in the liability in 2004 was primarily related to a slight decrease in the number of beneficiaries assigned to the Company at October 1, 2004 compared to the amount estimated at the end of 2003. As a result, the estimate of assigned beneficiaries in future periods was also lower.
The $31.3 million charge in 2003 was primarily related to the assumed increase in the number of unassigned beneficiaries allocated to the Company. The increased allocation was due to two factors. First, the Company increased its allocation percentage because of a change in the way the Company interprets the statute governing the allocation, based on findings of court cases in 2003. Second, other coal operations became insolvent during the period and their assigned beneficiaries were transferred to the unassigned pool. These actions reduced the denominator (the total assigned pool) in the computation of the allocation percentage, increasing the Company’s allocation assumption, and increased the unassigned pool.
Withdrawal Liabilities. The Company withdrew from the UMWA 1950 and 1974 pension plans in June 2005 as the last employees working under UMWA labor agreements left the Company. As a result of the withdrawal from these coal-related plans, the Company expects to be obligated to pay the plans $30.5 million, which represents the Company’s portion of the unfunded status of the plans as of June 30, 2004, as determined by the plan agreements and by law.
The Company’s estimate of the obligation in 2004 and 2003 was based on the funded status of the multi-employer plans for the most recent measurement date. The change in the Company’s liability in the last three years was due to changes in the UMWA plans’ unfunded liabilities.
Other. The Company recorded $6.2 million in 2005, to reflect an increase in the estimated cost of reclamation at its former coal mines. The estimate of the cost of reclamation may change in the future.
In 2004, the Company recognized $4.9 million of expense to reflect an increase in the expected settlement of coal-related workers’ compensation claims. In 2004 the Company settled legal and other contingencies related to its former coal operations and recognized additional expense of $3.3 million.
In 2003, the Company and a third party reached an agreement that establishes the allocation of costs related to an environmental remediation project, and as a result, the Company recognized a $5.3 million pretax gain. The Company estimates its portion of the remaining clean-up and operational and maintenance costs related to the environmental matter to be $2.7 million.