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JOY > SEC Filings for JOY > Form 10-K on 22-Dec-2011All Recent SEC Filings

Show all filings for JOY GLOBAL INC

Form 10-K for JOY GLOBAL INC


22-Dec-2011

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with the Consolidated Financial Statements and related notes. References made to years are for fiscal year periods. Dollar amounts are in thousands, except share and per-share data and as indicated.

The purpose of this discussion and analysis is to enhance the understanding and evaluation of the results of operations, financial position, cash flows, indebtedness, and other key financial information of Joy Global Inc. and its subsidiaries for 2011, 2010, and 2009. For a more complete understanding of this discussion, please read the Notes to Consolidated Financial Statements included in this report.

Overview

We have been manufacturing mining equipment for over 125 years. We operate in two business segments: Underground Mining Machinery, comprised of our Joy Mining Machinery business and Surface Mining Equipment, comprised of our P&H Mining Equipment business. Joy is a leading producer of high productivity underground mining machinery for the extraction of coal and other bedded materials. P&H is the world's largest producer of high productivity electric mining shovels and a major producer of rotary blasthole drills, walking draglines and large wheel loaders used primarily for surface mining of copper, coal, iron ore, oil sands, and other minerals.

In addition to selling original equipment, we provide parts, components, repairs, rebuilds, diagnostic analysis, training, and other aftermarket services for our installed base of machines. In the case of Surface Mining Equipment, we also provide aftermarket services for equipment manufactured by other companies, including manufacturers with which we have ongoing relationships and which we refer to as "Alliance Partners." We emphasize our aftermarket products and services as an integral part of lowering our customers' cost per unit of production and are focused on continuing to grow this part of our business.

LeTourneau Technologies, Inc.

On June 22, 2011 we acquired LeTourneau Technologies, Inc. for approximately $1.1 billion. We purchased all of the outstanding capital stock and financed the acquisition with cash on hand and borrowings of $500.0 million under a new credit facility. LeTourneau designs, builds and supports equipment for the mining industry and has been a leader in the earthmoving equipment industry since the 1920s. LeTourneau historically operated in three business segments, mining, steel products and drilling products. The mining products business is the world's leading manufacturer of large wheel loaders for surface mining, providing the industry's largest model sizes and payload capacities.

On October 24, 2011 we completed the sale of LeTourneau Technologies Drilling Systems, Inc. to Cameron International Corporation for $375.0 million in cash, subject to a post-closing working capital adjustment. In connection with this transaction, the LeTourneau facilities in Houston, Texas and Vicksburg, Mississippi have been sold while the Longview, Texas facility will remain with us. We have entered into a Transition Manufacturing and Supply Agreement to allow for the orderly transfer of drilling products work from Longview and a Steel Supply Agreement to allow the buyer time to develop other sources. In conjunction with our entrance into the Transition Manufacturing and Supply Agreement, we recognized an upfront loss and related liability of $23.3 million for manufacturing costs to be incurred that will not be reimbursed. The results of the drilling products business are included in discontinued operations on the accompanying consolidated statement of income and the assets and liabilities of the drilling products business that either transferred after our fiscal year end or remain our obligation are reflected as assets and liabilities of discontinued operations on the accompanying consolidated balance sheet. The results of the mining and steel businesses (collectively "the mining equipment business") are included in our Surface Mining Equipment segment. From the date of acquisition until our fiscal year end, the mining equipment business of LeTourneau had net sales of $144.9 million and operating income of $23.2 million.


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International Mining Machinery

On July 11, 2011 we entered into a Share Purchase Agreement ("SPA") with TJCC Holdings Limited, a corporation controlled by The Jordan Company, L.P., to acquire 534.8 million shares of common stock, or approximately 41.1%, of IMM, for HK$8.50 per share, or approximately $584.2 million subject to exchange rate fluctuation. IMM is a leading designer and manufacturer of underground coal mining equipment in China. On July 28, 2011, August 16, 2011 and September 2, 2011 we purchased approximately 136.5 million, 102.0 million and 127.2 million shares, respectively, of IMM for a total of $376.7 million. These shares were purchased on the open market and represent approximately 28.1% of the total outstanding shares of IMM. On December 20, 2011, MOFCOM approved the purchase of IMM shares covered by the SPA and the acquisition is expected to close on or around December 30, 2011. At such time, we will have a controlling interest of approximately 69.2% of IMM's outstanding common stock and accordingly will be required under Rule 26.1 of the Hong Kong Takeovers Code to make an unconditional cash tender offer to purchase the remaining outstanding shares and options to purchase shares at a minimum per share purchase price of HK$8.50. If all of the shares and options to purchase shares of IMM common stock are purchased, the aggregate purchase price would be approximately $456.1 million subject to exchange rate fluctuation. We expect that this investment in IMM will strengthen our presence in China and other emerging markets. IMM reported revenues of RMB 1,942 million ($306.3 million) and operating profit of RMB 417 million ($65.8 million) for its most recent fiscal year ending December 31, 2010. During fiscal 2011, our initial investment in IMM was accounted for under the equity method and we recognized estimated income of $3.4 million.

Operating Results

Bookings for 2011 were $5.6 billion, an increase of 44.3% from the prior year. Original equipment bookings increased $1.2 billion, or 75.1% from the prior year and were driven by electric mining shovel orders for copper in South America and coal in North America and room and pillar orders in the U.S. and longwall systems orders in Australia. Aftermarket bookings increased $522.8 million, or 22.9%, as parts and service orders remain strong across most regions for both the Underground Mining Machinery and Surface Mining Equipment segments. The increase in both original equipment and aftermarket orders reflects continued demand for mining equipment as demand for commodities remains strong. Fiscal year 2011 bookings included a $179.2 million favorable effect of foreign currency translation.

Net sales for 2011 totaled $4.4 billion compared to $3.5 billion in 2010. Aftermarket sales increased $520.9 million, or 24.8%, when compared to the prior year on increased parts sales across all regions for both the Underground Mining Machinery and Surface Mining Equipment segments. Original equipment sales increased $358.6 million, or 25.1%, when compared to the prior year primarily on improved sales in the U.S., Australia and South America. Foreign currency translation favorably impacted sales by $109.3 million.

Operating income was $920.2 million in 2011, compared to $697.1 million in 2010 and included an $18.7 million favorable effect of foreign currency translation. The increase in operating income was primarily the result of increased sales volumes, positive price realization, and favorable overhead absorption. These items were partially offset by increased product development, selling and administrative expenses.

The results of LeTourneau's mining equipment business are included in our Surface Mining Equipment segment. From June 22, 2011 through the end of our fiscal year, LeTourneau's mining equipment business had bookings of $139.4 million, net sales of $144.9 million and operating income of $23.2 million. Operating income was reduced by $12.2 million for purchase accounting charges, of which $7.7 million was attributable to acquired inventories.

Net income from continuing operations was $631.0 million or $5.92 per diluted share in 2011 compared to $461.5 million or $4.40 per diluted share in 2010.


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                             Results of Operations

2011 Compared with 2010

Sales

The following table sets forth 2011 and 2010 net sales as derived from our
Consolidated Statement of Income:

                                                                       $            %
    In thousands                      2011            2010          Change       Change

    Net Sales
    Underground Mining Machinery   $ 2,576,625     $ 2,126,788     $ 449,837        21.2 %
    Surface Mining Equipment         1,959,353       1,518,605       440,748        29.0 %
    Eliminations                      (132,072 )      (121,059 )     (11,013 )      (9.1 )%
    Total                          $ 4,403,906     $ 3,524,334     $ 879,572        25.0 %

Underground Mining Machinery net sales for 2011 were $2.6 billion compared to $2.1 billion for 2010, and included a $287.7 million increase in aftermarket sales and a $162.1 million increase in original equipment sales. Aftermarket sales increased across all regions. Specifically, aftermarket sales increased in the U.S. and Australasia by $113.5 million and $55.6 million, respectively, primarily due to the strengthening of the parts and rebuild markets in these regions. Additionally, strong parts demand in China caused aftermarket sales to increase by 56.8%, or $52.1 million. The increase in original equipment sales was led primarily by increased room and pillar sales in both the U.S. and South Africa and by roof support sales for longwall application equipment orders in Australasia. These increases were partially offset by decreased longwall equipment volumes in Eurasia and China. Foreign currency translation favorably impacted sales by $77.4 million.

Surface Mining Equipment net sales for 2011 were $2.0 billion compared to $1.5 billion for 2010, which included a $189.2 million increase in aftermarket sales, a $106.6 million increase in original equipment sales and $144.9 million in sales from the mining equipment business of LeTourneau. Aftermarket sales increased across all regions and were led by increased sales in North and South America of $64.5 million and $91.6 million, respectively. Original equipment sales of electric mining shovels and drills increased across all regions, with the exception of North America. Foreign currency translation favorably impacted sales by $31.9 million.

Operating Income

The following table sets forth 2011 and 2010 operating income as derived from
our Consolidated Statement of Income:

                                              2011                                   2010
                                  Operating              %               Operating              %
In thousands                    Income (loss)       of Net Sales       Income (loss)       of Net Sales

Operating income (loss):
Underground Mining Machinery   $       595,262               23.1 %   $       433,902               20.4 %
Surface Mining Equipment               422,472               21.6 %           336,236               22.1 %
Corporate Expense                      (65,693 )                -             (43,126 )                -
Eliminations                           (31,862 )                -             (29,909 )                -
Total                          $       920,179               20.9 %   $       697,103               19.8 %


Index

Operating income for the Underground Mining Machinery segment was $595.3 million in fiscal 2011, compared to operating income of $433.9 million in fiscal 2010. Operating income was favorably impacted by $175.1 million due to higher sales volumes, $52.2 million due to favorable manufacturing overhead absorption and $45.4 million in favorable overall price realization. These increases were partially offset by $67.9 million of unfavorable changes in material price variances due to rising steel costs and other surcharges, $49.4 million of increased product development, selling and administrative expenses and $6.6 million from a prior year foreign currency gain that was not repeated in the current year. Foreign currency translation favorably impacted operating income by $17.9 million.

Operating income for the Surface Mining Equipment segment was $422.5 million in fiscal 2011, compared to operating income of $336.2 million in fiscal 2010. Operating income was favorably impacted by $172.4 million due to higher sales volumes, $17.7 million due to favorable manufacturing overhead absorption and $11.3 million of cancellation charges. Operating income in 2011 includes $23.2 million from LeTourneau's mining equipment business which includes purchase accounting charges of $12.2 million. Partially offsetting these increases were $41.1 million of unfavorable changes in material price variances due to rising material costs and surcharges and $48.0 million of increased product development, selling and administrative expense.

Corporate expense increased due to acquisition transaction costs of $19.7 million.

Product Development, Selling and Administrative Expense

Product development, selling and administrative expense was $602.0 million, or 13.7% of sales, in 2011, compared to $480.6 million, or 13.6% of sales, in 2010. Before acquisition transaction costs of $19.7 million in 2011, product development, selling and administrative expenses totaled $582.3 million, or 13.2% of sales. Product development costs increased by $20.8 million, which is attributable to research and development activities on new or existing products and increased personnel for smart services activities. Selling costs increased by $34.0 million due to travel, warehouse costs to support increased parts volumes and the inclusion of $5.6 million from LeTourneau's mining equipment business. Administrative expenses increased primarily due to acquisition transaction costs.

Net Interest Expense

Net interest expense was $24.3 million in 2011, compared to $16.8 million in 2010. Net interest expense increased as a result of additional borrowings. We entered into a $500.0 million term loan dated June 16, 2011 for the acquisition of LeTourneau and issued $500.0 million of Senior Notes on October 12, 2011 in anticipation of completing the IMM transaction.

Provision for Income Taxes

Income tax expense for 2011 was $264.8 million, as compared to $217.5 million in 2010. The effective income tax rates from continuing operations were 29.6% and 32.0%, for 2011 and 2010, respectively. The main drivers of the variance in tax rates when compared to the statutory rate of 35% were the geographic mix of earnings with the corresponding net favorable differences in foreign statutory tax rates and the utilization of tax credits and tax holidays, offset by increased state income taxes and the establishment of valuation reserves.

A net discrete tax benefit of $5.4 million was recorded in 2011 as compared to a net discrete tax benefit of $3.4 million in 2010. A review of uncertain income tax positions was performed throughout 2011 and 2010 as part of the overall income tax provision and a net benefit of $2.9 million and $4.4 million, respectively, was recorded on a global basis.


Index

2010 Compared with 2009

Sales

The following table sets forth 2010 and 2009 net sales as derived from our Consolidated Statement of Income:

                                                                       $             %
    In thousands                      2010            2009           Change       Change

    Net Sales
    Underground Mining Machinery   $ 2,126,788     $ 2,278,691     $ (151,903 )      (6.7 %)
    Surface Mining Equipment         1,518,605       1,460,445         58,160         4.0 %
    Eliminations                      (121,059 )      (140,822 )       19,763           -
    Total                          $ 3,524,334     $ 3,598,314     $  (73,980 )      (2.1 %)

Underground Mining Machinery net sales for 2010 were $2.1 billion compared to $2.3 billion for 2009, and included a $223.2 million decrease in original equipment sales, partially offset by a $71.3 million increase in aftermarket sales. Net sales in 2010 increased by $92.9 million due to the effect of foreign currency translation. Original equipment sales decreased by $182.8 million in the United States and $61.5 million in Australasia, primarily due to decreased longwall equipment shipments in both regions. Original equipment sales also decreased in South Africa by $112.9 million, primarily due to decreased room and pillar and longwall mining equipment shipments. These decreases were partially offset by a $115.8 million increase in original equipment sales, primarily of longwall equipment, in China. Aftermarket sales were up in all regions, but most significantly in South Africa, primarily due to complete machine rebuilds.

Surface Mining Equipment net sales for 2010 were $1.52 billion compared to $1.46 billion for 2009, and included a $63.9 million increase in aftermarket sales, partially offset by a $5.7 million decrease in original equipment sales. Net sales in 2010 increased by $45.6 million due to the effect of foreign currency translation. The decrease in original equipment was primarily due to decreased electric mining shovel and drill sales and decreased crushing and conveying equipment sales, which were partially offset by increased alliance sales. The increase in aftermarket sales was primarily related to increased repair and rebuilds in all regions, with the exception of emerging markets.

Operating Income

The following table sets forth 2010 and 2009 operating income as derived from
our Consolidated Statement of Income:

                                                   2010                                   2009
                                       Operating              %               Operating              %
In thousands                         Income (loss)       of Net Sales       Income (loss)       of Net Sales

Operating income (loss):
Underground Mining Machinery        $       433,902               20.4 %   $       461,019               20.2 %
Surface Mining Equipment                    336,236               22.1 %           322,170               22.1 %
Corporate Expense                           (43,126 )                -             (41,759 )                -
Eliminations                                (29,909 )                -             (39,118 )                -
Total                               $       697,103               19.8 %   $       702,312               19.5 %

Operating income for Underground Mining Machinery was $433.9 million in 2010, compared to operating income of $461.0 million in 2009. Operating income was favorably impacted in 2010 by $18.5 million due to the effect of foreign currency translation. Operating income was unfavorably impacted by $46.7 million associated with lower sales volumes, $22.1 million of increased retiree benefit expense, $9.0 million of warranty and performance penalties and $5.8 million of product expense, primarily made up of research & development costs. Partially offsetting these decreases in operating income were higher margins related to price realization and the mix of products sold, favorable material input costs, and the benefit of prior year cost reduction programs. Operating income in 2009 was reduced by $9.0 million for severance and related expenses not repeated in 2010.


Index

Operating income for Surface Mining Equipment was $336.2 million in 2010, compared to operating income of $322.2 million in 2009. Operating income was favorably impacted in 2010 by $2.5 million due to the effect of foreign currency translation. Operating income was favorably impacted by higher sales volumes, favorable material input costs of $7.1 million, and the benefit of prior year cost reduction programs. These increases were partially offset by $11.4 million of increased retiree benefit expense. In addition, cancellation income of $8.5 million was recorded in 2009 and not repeated in 2010.

Product Development, Selling and Administrative Expense

Product development, selling and administrative expense was $480.6 million, or 14% of sales, in 2010, compared to $454.5 million, or 13% of sales, in 2009. These expenses were unfavorably impacted by $17.8 million due to the effect of the foreign currency translation. Product development, selling and administrative expense increased in 2010 due to $22.4 million of increased retiree benefit costs and $7.2 million of increased performance based compensation, partially offset by the benefit of cost saving initiatives implemented in 2009. Administrative expense also included increased severance and related expenses of $14.4 million in 2009 that was not repeated in 2010.

Net Interest Expense

Net interest expense was $16.8 million in 2010, compared to $24.7 million in 2009. Net interest expense decreased primarily due to interest earned on increased cash and cash equivalents.

Provision for Income Taxes

Income tax expense was $217.5 million in 2010, with an effective tax rate of 32.0%, compared to income tax expense of $228.0 million in 2009, with an effective tax rate of 33.4%. The main drivers of the variance in tax rates when compared to the statutory rate of 35.0% were the geographic mix of earnings and the utilization of tax credits and tax holidays offset by increased state income taxes and establishment of valuation reserves.

A net discrete tax benefit of $3.4 million was recorded in 2010, compared to net discrete tax expense of $8.2 million in 2009. A review of uncertain income tax positions was performed throughout 2010 and 2009 and a net benefit of $4.4 million and $1.8 million, respectively, was recorded.

Reorganization Items

Reorganization items include income, expenses, and losses that were realized or
incurred by the Predecessor Company as a result of its decision to reorganize
under Chapter 11 of the Bankruptcy Code. We emerged from protection under
Chapter 11 of the U.S. Bankruptcy Code on July 12, 2001.

Net reorganization items for 2011, 2010, and 2009 consisted of the following:

In thousands                                    2011          2010          2009

Beloit U.K. receivership settlement           $       -     $       -     $   5,665
Professional fees directly related to the
reorganization and other                            (35 )      (1,310 )        (605 )
Net reorganization (expense) income           $     (35 )   $  (1,310 )   $   5,060


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Critical Accounting Policies

Our discussion and analysis of financial condition and results of operations is based upon our Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these Consolidated Financial Statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses, and related disclosure of contingent assets and liabilities. We continually evaluate our estimates and judgments, including those related to bad debts, excess inventory, warranty, intangible assets, income taxes, and contingencies. We base our estimates on historical experience and assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates.

We believe the accounting policies described below are the policies that most frequently require us to make estimates and judgments, and therefore are critical to the understanding of our results of operations.

Revenue Recognition

We recognize revenue on aftermarket products and services when the following criteria are satisfied: persuasive evidence of an arrangement exists, product delivery and title transfer has occurred or the services have been rendered, the price is fixed and determinable, and collectability is reasonably assured. We recognize revenue on long-term contracts, such as for the manufacture of mining shovels, draglines, roof support systems and conveyor systems, using the percentage-of-completion method. When using the percentage-of-completion method, sales and gross profit are recognized as work is performed based on the relationship between actual costs incurred and total estimated costs at completion. Sales and gross profit are adjusted prospectively for revisions in estimated total contract costs and contract values. Estimated losses are recognized in full when identified. Approximately 85% of our sales in 2011 were recorded at the time of shipment of the product or delivery of the service, with the remaining 15% of sales recorded using percentage of completion accounting.

We have life cycle management contracts with customers to supply parts and service for terms of 1 to 17 years. These contracts are established based on the conditions the equipment will be operating in, the time horizon that the contracts will cover, and the expected operating cycle that will be required for the equipment. Based on this information, a model is created representing the projected costs and revenues of servicing the respective machines over the specified contract terms. Accounting for these contracts requires us to make various estimates, including estimates of the relevant machine's long-term maintenance requirements. Under these contracts, customers are generally billed monthly based on hours of operation or units of production achieved by the equipment, with the respective deferred revenues recorded when billed. Revenue is recognized in the period in which parts are supplied or services provided. These contracts are reviewed quarterly by comparison of actual results to original estimates or most recent analysis, with revenue recognition adjusted appropriately for future estimated costs. If a loss is expected at any time, the full amount of the loss is recognized immediately.

We have certain customer agreements that are multiple element arrangements as defined by the Accounting Standards Codification ("ASC") No. 605-25 "Multiple-Element Arrangements." The agreements are assessed for multiple elements based on the following criteria: the delivered item has value to the customer on a standalone basis, there is objective and reliable evidence of the fair value of the undelivered item, and the arrangement includes a general right of return relative to the delivered item and delivery or performance of the undelivered item is considered probable and substantially in the control of the vendor. Revenue is then allocated to each identified unit of accounting based on our estimate of their relative fair values.

Revenue recognition involves judgments, including assessments of expected returns, the likelihood of nonpayment, and estimates of expected costs and profits on long-term contracts. We analyze various factors, including a review of specific transactions, historical experience, credit-worthiness of customers, . . .

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