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| JOY > SEC Filings for JOY > Form 10-Q on 28-Feb-2013 | All Recent SEC Filings |
28-Feb-2013
Quarterly Report
Overview
Joy Global Inc. is a leading manufacturer and servicer of high-productivity
mining equipment for the extraction of coal and other minerals and ores. We
manufacture and market original equipment and aftermarket parts and services for
both underground and surface mining and certain industrial applications. Our
equipment is used in major mining regions throughout the world to mine coal,
copper, iron ore, oil sands, gold and other minerals. We operate in two business
segments: Underground Mining Machinery and Surface Mining Equipment. We are a
major manufacturer of underground mining machinery 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, and
Australia.
Operating Results
Net sales in the first quarter of 2013 were $1.1 billion, a 1.2% increase
compared to the first quarter of 2012. The increase in net sales in the current
year first quarter includes a $17.2 million increase in original equipment
sales, primarily due to higher shipments in Australia, and a $3.5 million
decrease in aftermarket sales, primarily due to production declines in the
domestic coal market. Compared to the prior year first quarter, net sales in the
first quarter of 2013 included a $4.1 million favorable effect of foreign
currency translation.
Operating income in the first quarter of 2013 was $221.2 million, compared to
$213.7 million in the first quarter of 2012. The 3.5% increase in operating
income in the first quarter is due to a reduction in product development,
selling and administrative expenses, partially offset by increased period costs.
Restructuring activities continued in the quarter to better align our cost
structure to anticipated future requirements.
Bookings in the first quarter of 2013 were $1.0 billion, compared to $1.4
billion in the first quarter of 2012. The 28.5% decrease in bookings in the
current year first quarter includes a $245.2 million decrease in original
equipment sales, primarily due to significant orders in the prior year that did
not repeat in the current year and the weak U.S. coal market. The decline in
bookings also includes a $164.1 million decrease in aftermarket sales due to
decreased demand in all regions. Compared to the prior year first quarter,
bookings in the first quarter of 2013 included a $5.4 million unfavorable effect
of foreign currency translation.
The results of IMM are included with our Underground Mining Machinery segment.
For the first quarter of 2013, IMM had bookings of $61.1 million, net sales of
$57.5 million and operating income of $14.1 million. Operating income was
positively impacted by $3.8 million for the true-up of non-recurring purchase
accounting charges associated with finalizing the valuation of the acquired
order backlog.
Income from continuing operations attributable to Joy Global was $142.1 million
or $1.33 per diluted share in the first quarter of 2013, compared to $142.4
million or $1.33 per diluted share in the prior year first quarter.
Market Outlook
After struggling through much of 2012, global economic activity reached its
highest level of the year in the fourth quarter. While U.S. fiscal policy was an
overhang on the fourth quarter, many other indicators provided encouraging signs
for the U.S. economy as 2013 began, including improving labor statistics,
strengthening industrial production and recovering residential and
non-residential construction. While Eurozone economic troubles continue, data
suggests that the fourth quarter of 2012 could be a bottoming for the region.
However, it is unlikely that the Eurozone will escape recessionary territory
during the first half of 2013.
The Chinese economy is reporting that year over year growth is now improving in
numerous key measures, and this has positive implications for global growth.
China GDP rebounded during the fourth quarter. Activity in China's manufacturing
sector increased to an 18-month high in December, while electricity consumption
increased to the highest level in 11 months. Trade data from January has also
been encouraging. Chinese imports increased in January following growth in
December, and Chinese exports rose during January.
During 2012, the U.S. coal market faced headwinds, primarily due to low natural
gas prices. U.S. coal production declined in 2012, as reduced U.S. power
generation was only partially offset by increased coal exports. Increasing
natural gas prices from their April lows contributed to a switch back to coal
for electricity generation. This trend of natural gas to coal switching is
likely to continue in 2013. While coal-fired generation declined in 2012, the
U.S. coal market is expected to see gains in 2013 as higher natural gas prices
and improving economic activity lead to an estimated increase in coal burn.
Although utility stockpiles were down at year end, they will still need further
depletion in 2013 and this could restrict coal deliveries to power stations. One
of the strongest drivers of U.S. coal in 2012 was the export market, as U.S.
coal producers found demand for excess thermal coal from increased coal burn in
Europe and the record level of imports by China and India. Exports are expected
to come off their record pace, but remain at historically high levels in 2013.
Seaborne thermal coal markets remained steady over the final months of 2012.
While seaborne prices are down since January 2012, increased imports by China
and India have helped to support the market. China coal imports increased in
December and for the full-year. India, driven by an increase in coal-fired
generation during the year, saw an increase in thermal coal imports. In 2012,
seaborne thermal coal markets also found support from Japan and Europe as higher
natural gas prices and concern over nuclear power shifted the generating mix to
coal. Through November 2012, Japan's and Europe's thermal coal imports rose. A
supply surplus remains in the global thermal coal market, and this has kept
recent prices range-bound. The supply surplus and this pricing level continue to
pressure high cost producers of thermal coal.
Global steel production in the fourth quarter increased year-over-year. Most of
this production growth came from China and North America. With global steel
demand expected to increase further in 2013, steel mills have begun to replenish
depleted inventories of metallurgical coal and iron ore, which has provided
further support to prices. By the end of January, Chinese iron ore stockpiles
were reduced significantly. After reaching lows in September, seaborne iron ore
prices have rebounded.
Metallurgical coal is following a similar path with expected additional demand
in 2013 due to increased global steel production. After reaching lows in
September, metallurgical coal prices have increased. Metallurgical coal prices
are expected to continue moving up as demand improves through 2003.
Global copper markets remain strongly positioned with improving demand expected.
Refined copper was in supply deficit for 2012. In 2013, completion of several
mine expansions should increase mine supply, reducing the deficit. However,
production disruptions due to labor strife, weather or geology are normal, and
production targets have seldom been met. In addition, most of the projected
production increases in 2013 are expected to come from high risk areas, such as
central Africa, increasing the likelihood of shortfall. Demand could also
surprise to the upside with continued improvement in the China economy.
We believe that the increasing number of key indicators that are turning
positive will begin to increase commodity demand and provide support for prices.
Although timing is uncertain, this will lead to additional approvals for mine
expansions.
Company Outlook
Through most of 2012, the outlook for our company was focused on the number and
timing of mine expansion projects that could provide upside opportunity to our
order run rate. This quarter's decline in aftermarket orders expands the focus.
We evaluate our aftermarket on a sequential basis as well as year over year because of the quick turn of orders into shipments. The sequential decline in aftermarket orders from the fourth quarter was concentrated in three regions, and was a mixture of anticipated softness and timing issues. We had expected near term softness in aftermarket orders in Australia as customers there cope with margin pressure from lower commodity prices and increasing costs. Although the cost increases were largely from non-operating factors, such as capital expenditure overruns, increased taxes and adverse exchange rates, miners deployed broader efforts to reduce costs. This has primarily resulted in reduction of general contractor activities, but also slowed decisions on normal parts and services that we provide. The resulting order reductions are not sustainable, and we expect aftermarket order rates in Australia to return to normal.
We also had sequential aftermarket order rate declines in markets that have strong outlooks, but these were due to timing. South America is a region with our strongest outlook, and yet timing issues significantly reduced this quarter's aftermarket orders. Aftermarket order rates for Africa were slowed by labor unrest despite a number of projects in progress to increase production of both coal and iron ore. These three regions - Australia, South America and Africa - accounted for most of this quarter's sequential decline in aftermarket orders, and we believe these markets will recover. These examples indicate that our aftermarket orders may continue to experience variability until demand reduces the supply surplus that currently exists in a number of commodities.
While some regions have underperformed, we are seeing encouraging signs from the U.S. coal market. After four quarters of sequential decline, both original equipment and aftermarket orders stabilized over our first quarter. U.S. aftermarket
orders have declined more than end-use consumption as our customers reduced the parts inventories they hold at mine site and stretched the time between rebuilds. Parts orders should continue to return to end-use consumption levels, and delayed rebuilds require increased work and therefore their impact is mostly timing.
The timing of mine expansion projects has a major impact on our company outlook, and we expect these projects to continue to move slowly and to be lumpy. Many of our customers have new management, and their focus has moved from volume to returns. They are systematically re-evaluating all of their capital expenditures, and this continues to delay decisions. We maintain a project list of mine expansion prospects that we expect to reach equipment selection in the next twelve months. Our customers' reassessment of their capital expenditures has created increased activity with the projects on this list. A number of projects have been delayed outside the horizon tracked by this report, but there have also been a significant number of projects moved onto the list. As a result, this list has stabilized during the current quarter, after several quarters of sequential declines. The quality of the list has also substantially improved. In combination, this raises our outlook. This is consistent with other leading indicators, such as electricity demand and steel production in China and construction activity in the U.S.
However, we think it will take time before those leading indicators translate into increased capital expenditures by our customers. Our customers let demand improvement reduce the supply surplus and provide pricing support before they add capacity. This means that unless projects are already deep in process, decisions are not likely to be made before the second half of this year, and therefore will not impact our revenues before next year.
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