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| JOY > SEC Filings for JOY > Form 10-Q on 4-Jun-2012 | All Recent SEC Filings |
4-Jun-2012
Quarterly Report
The following discussion should be read in conjunction with our Condensed Consolidated Financial Statements and the related notes to the Condensed Consolidated Financial Statements in Item 1 of this Quarterly Report on Form 10-Q. Dollar amounts are in thousands, except share and per share data and as indicated.
Joy Global Inc. is a worldwide leader in high-productivity mining solutions. We manufacture and market original equipment and aftermarket parts and services for both underground and surface mining and certain industrial applications through two business segments: Underground Mining Machinery and Surface Mining Equipment. We are a major manufacturer of underground mining equipment for the extraction of coal and other bedded minerals and offer comprehensive service locations near major mining regions worldwide. We are also a major producer of surface mining equipment for the extraction of ores and minerals and we provide extensive operational support for many types of equipment used in surface mining. Our principal manufacturing facilities are located in the United States, including facilities in Pennsylvania, Wisconsin, Kentucky, Texas and Alabama and international facilities in China, the United Kingdom, South Africa, Canada, Chile and Australia.
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 approximately 41.1%, of IMM. 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 shares on the open market representing approximately 28.1% of the total outstanding shares of IMM. On December 20, 2011, the Anti-monopoly Bureau of the Ministry of Commerce approved the purchase of IMM shares covered by the SPA and the acquisition closed on December 29, 2011. At such time, we acquired a controlling interest of IMM which, when aggregated with earlier open market purchases, was approximately 69.2% of IMM's outstanding common stock. Upon closing, we recognized a $19.4 million gain on the re-measurement of our pre-existing equity interest in IMM. On January 6, 2012, in accordance with Rule 26.1 of the Hong Kong Takeovers Code, we commenced an unconditional cash tender offer to purchase the remaining outstanding IMM shares and options to purchase IMM shares that we did not own. On February 10, 2012, we completed the tender offer. As a result of the tender offer, we beneficially own approximately 98.9% of IMM's common stock, for which we have paid aggregate consideration of approximately $1.4 billion. The purchase of shares acquired in the tender offer was funded from cash held in escrow, which consisted of the remaining net proceeds from the October 2011 issuance of the 2021 Notes and the October 2011 sale of the drilling products business of LeTourneau, and borrowings under the October 31, 2011 term loan commitment. We intend to effect the compulsory acquisition of the remaining shares under applicable provisions of the Cayman Island Companies Law, under which IMM is incorporated. We expect to pay consideration of approximately $16.3 million, calculated at present exchange rates, to complete the compulsory acquisition. We expect to complete the compulsory acquisition of the remaining shares in our third fiscal quarter of 2012 using the remaining cash held in escrow. The combined effect of these transactions will result in our beneficial ownership of 100% of the common stock of IMM.
Operating Results
Bookings in the second quarter of 2012 were approximately $1.2 billion, a decrease of 19.2% from the prior year second quarter. Original equipment bookings decreased $294.8 million or 38.4%, while aftermarket bookings increased $1.3 million or 0.2%. The Surface Mining Equipment segment original equipment bookings excluding LeTourneau decreased 41.6% when compared to the prior year second quarter while aftermarket bookings excluding LeTourneau increased 0.6% when compared to the prior year second quarter. Original equipment bookings for the Underground Mining Machinery segment excluding IMM decreased 62.1% as a result of a
weakening U.S. coal market and a significant Australian booking in the prior year's second quarter that was not repeated in the current year. Orders decreased in the United States and South Africa, and were partially offset by increased orders in China and Eurasia. Aftermarket bookings excluding IMM decreased 12.2% when compared to the prior year second quarter. Foreign currency translation unfavorably impacted bookings by $17.1 million when compared to the prior year first quarter.
Net sales in the second quarter of 2012 were approximately $1.5 billion, an increase of 45.0% from the prior year, which includes a $110.5 million increase in aftermarket sales and a $367.8 million increase in original equipment sales. Sales increased in most regions for both segments as we worked through our strong backlog. Foreign currency translation unfavorably impacted sales by $5.3 million when compared to the second quarter of the prior year.
Operating income in the second quarter of 2012 increased by $99.4 million to $333.4 million, an increase of 42.5%, as a result of higher sales volume. These benefits were partially offset by higher product development, selling and administrative expenses, including $1.8 million of acquisition related transaction costs.
The results of LeTourneau's mining equipment business are included with our Surface Mining Equipment segment. For the second quarter, LeTourneau's mining equipment business had bookings of $128.4 million, net sales of $133.2 million and operating income of $20.6 million. Operating income was negatively impacted by $5.7 million for purchase accounting charges, of which $4.9 million was attributable to the step-up of acquired inventories.
The results of IMM are included with our Underground Mining Machinery segment. For the second quarter, IMM had bookings of $97.5 million, net sales of $87.3 million and operating income of $4.0 million. Operating income was negatively impacted by $17.4 million for purchase accounting charges attributable to the step-up of acquired inventories.
Net income from continuing operations attributable to Joy Global was $217.9 million or $2.04 per diluted share in the second quarter of 2012, compared to $162.0 million or $1.52 per diluted share in 2011.
Bookings in the first six months of fiscal 2012 were approximately $2.7 billion, a decrease of 3.2% from the prior year six month period. Original equipment bookings decreased $253.2 million or 18.0%, while aftermarket bookings increased $166.2 million or 12.4% as parts, service and rebuild orders were strong across most regions. The Surface Mining Equipment segment original equipment bookings excluding LeTourneau decreased 4.7% when compared to the prior year. Original equipment bookings for the Underground Mining Machinery segment excluding IMM decreased 39.5% as a result of a weakening U.S. coal market in the second quarter and a significant Australian booking in the prior year that was not repeated in the current year. Foreign currency translation unfavorably impacted bookings by $26.4 million when compared to the prior year six months.
Net sales in the first six months of fiscal 2012 were approximately $2.7 billion, an increase of 38.6% from the prior year, which includes a $206.7 million increase in aftermarket sales and a $538.3 million increase in original equipment sales. Sales increased in most regions for both segments. Foreign currency translation unfavorably impacted sales by $9.1 million when compared to the first six months of the prior year.
Operating income in the first six months of fiscal 2012 increased by $159.3 million to $547.2 million, an increase of 41.1%, as a result of higher sales volume. These benefits were partially offset by higher product development, selling and administrative expenses, including $16.1 million of acquisition related costs.
The results of LeTourneau's mining equipment business are included with our Surface Mining Equipment segment. For the first six months, LeTourneau's mining equipment business had bookings of $212.7 million, net sales of $211.5 million and operating income of $23.7 million. Operating income was negatively impacted by $11.6 million for purchase accounting charges, of which $10.0 million was attributable to the step-up of acquired inventories.
The results of IMM are included with our Underground Mining Machinery segment. From the date of acquisition and consolidation, IMM had bookings of $113.0 million, net sales of $97.7 million and operating income of $4.5 million. Operating income was negatively impacted by $17.7 million for purchase accounting charges attributable to the step-up of acquired inventories.
Net income from continuing operations attributable to Joy Global was $360.3 million, or $3.37 per diluted share in the first six months of fiscal 2012 compared to $264.2 million or $2.48 per diluted share in 2011.
Market Outlook
Eurozone concerns and tempered growth expectations in China dominate the end markets for mined commodities. The fallout of the sovereign debt problems has slowed growth in Europe, with seven countries seeing little or negative growth. GDP growth in China hit its lowest rate in three years at 8.1% in the first quarter and year over year growth in industrial production fell to 9.3% in April, from 11.9% the prior month, raising concerns of a slowing in the Chinese economy. With inflation in China stabilizing in the range of 3.2% to 3.6%, the central government is expected to continue to reduce the required reserve ratio for bank lending after prior reductions led to increased spending in March.
The U.S. economy has been one of the better performers, but it has stabilized at moderate growth rates without a catalyst to the upside. As a result, demand growth for mined commodities has moderated and commodity prices have softened, reducing returns on expansion projects. Projects underway and future brownfield projects are continuing on schedule, but the next round of large, greenfield projects are being held for re-evaluation.
The U.S. thermal coal market is facing headwinds from weakening electricity demand, natural gas related electricity generation switching, and regulations that are causing retirement of the oldest coal-fired plants. Of these, the first two are related to weather and economic cycles, and are not secular shifts. An unusually warm winter has reduced year-to-date electricity generation by 5.4% below 2011 levels. Additional loss of coal demand for power generation has come from increased dispatching of natural gas, as prices earlier this year dipped below $2.00 per million BTUs. As a result of these combined effects, mines have scaled back production and are running at 73% capacity compared to 79% the year before. Coal shipments were down by an estimated 50 to 65 million annualized tons in the first calendar quarter, increasing to over 100 million annualized tons in March. The March rate of reduction is greater than the 85 to 90 million ton reduction estimated to be needed to balance the market, and this should enable elevated utility stockpiles to begin to be worked down.
The correction in U.S. metallurgical coal has been modest by comparison. Although there have been some curtailments, they have generally been minor and of short duration. U.S. steel demand has remained strong, with production up almost 7% year-to-date and metallurgical coal exports are expected to stay near last year's high levels. Metallurgical coal exports will be driven by steel production in the major metallurgical coal importing countries. Excluding China, these importing countries have increased steel production by 12% from a recent trough last December. This increase has occurred as metallurgical coal exports from Australia have been constrained by industrial action and heavy rainfall, providing further support for metallurgical coal prices. As a result, some U.S. coal producers are indicating that current demand for metallurgical coal is running ahead of their annual guidance and some mines have been brought back into production.
Copper prices have eased recently over concerns of high inventory levels in China. Although China appears to have completed a restocking period for copper, a substantial portion of the current inventory has been pledged as collateral for financing. This leaves low levels of inventory available to meet physical demand. This, combined with low global scrap inventories, should tighten copper supply and support copper prices. In addition, lower ore grades, production disruptions and project delays should result in a copper supply deficit again later this year.
Steel production in China is currently running at a rate 20% higher than the most recent trough in November of 2011. Although iron ore imports into China during the first quarter were up 6%, the recovery of steel production has reduced inventories by 5% through April. With limited demand upside in the near term, China steel production
is expected to remain roughly flat for the remainder of the year. This will result in an annualized production growth of 4 percent over last year. Low ore grades for China iron ore production and for imports from India set a high floor price, and should keep iron ore spot prices near current levels at $140 per metric ton.
China electricity generation from coal in the first quarter was up 7%. With seaborne thermal coal prices below $100 per metric tonne, seaborne coal has regained a cost advantage. As a result, coal imports were a record 58 million metric tonnes in the first quarter, up 27% on an annualized basis. India's coal-fueled power generation has increased 9% year to date and its domestic coal production continues to be challenged while tariffs have been eliminated from imported coal. As a result, India imported 31 million metric tonnes of coal in the first quarter, and imports are expected to exceed 100 million metric tonnes for the first time this year. Despite these demand increases, seaborne thermal coal markets remain oversupplied primarily due to continued recovery of production in Australia and U.S. producers looking to exports to offset soft domestic demand.
Despite these headwinds that are slowing the growth of commodity demand, there
are positive elements. In the U.S., power generation from natural gas has been
dispatched to the grid to the extent possible. This includes single cycle
peaking plants that are not designed to run continuously. As a result, much of
the available excess power generating capacity is in coal fueled units, and
therefore coal stands to benefit from the recovery of electricity demand. In
addition, the marginal cost of a new drilling program is substantially higher
than the current spot price for natural gas, and prices are expected to climb
above $4 per million BTUs as storage levels and current well production rates
decline. This should enable coal to recover some of its lost tons.
Internationally, China and India alone are expected to bring 90 gigawatts of new
coal fueled power generating capacity on line in 2012, and this will add
300 million tons to thermal coal demand.
Company Outlook
U.S. customers are using production cuts to rebalance their mine portfolios and to concentrate their future capacity on lower operating cost mines. This includes continuing the completion of expansion projects that are in progress. They are also using this time to plan major machine overhauls and upgrades to be prepared for anticipated recovery in coal-fueled power generation. International mining houses are shifting their focus away from the next round of greenfield plants to finishing the projects already underway and to pursuing smaller brownfield expansions that have lower risk and quicker returns.
As a result, we expect that our order rates could moderate and revenues flatten for a few quarters, until global economic recovery and stronger commodity demand provide the basis for customers returning to greenfield expansions. Current quarter bookings reflect the anticipated decline in demand for original equipment going into the U.S. market, but also include the normal lumpiness in timing that is characteristic of international projects. The current softness in the U.S. aftermarket orders is not expected to be completely offset by strength in the international markets, and therefore the aftermarket bookings rate is expected to adversely impact revenues.
Quarter Ended April 27, 2012 to Quarter Ended April 29, 2011
Net Sales
The following table sets forth the combined net sales included in our Condensed Consolidated Statement of Income.
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