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JOY > SEC Filings for JOY > Form 10-Q on 31-May-2013All Recent SEC Filings

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Form 10-Q for JOY GLOBAL INC


31-May-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
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 per share data and as indicated.

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, Texas and Alabama, and internationally, including facilities in China, the United Kingdom, South Africa, and Australia. Operating Results
Net sales in the second quarter of 2013 were $1.4 billion, compared to $1.5 billion in the second quarter of 2012. The 11.7% decrease in net sales in the current year second quarter included a $120.0 million decrease in original equipment sales and a $60.6 million decrease in aftermarket sales. Original equipment and aftermarket shipments were lower in all regions except South America and Africa. Compared to the prior year second quarter, net sales in the second quarter of 2013 included a $21.0 million unfavorable effect of foreign currency translation.
Operating income in the second quarter of 2013 was $278.6 million, compared to $333.4 million in the second quarter of 2012. The 16.4% decrease in operating income in the current year second quarter is due to lower sales volumes, partially offset by favorable product mix, decreased period costs and lower product development, selling and administrative expenses. Restructuring activities continued in the quarter to align the company's cost structure with anticipated demand.
Income from continuing operations attributable to Joy Global Inc. was $181.8 million, or $1.69 per diluted share, in the second quarter of 2013, compared to $217.9 million, or $2.04 per diluted share, in the second quarter of 2012. Bookings in the second quarter of 2013 were $1.1 billion, compared to $1.2 billion in the second quarter of 2012. The 8.3% decrease in bookings in the current year second quarter is made up of a $7.9 million increase in original equipment bookings, due in part to a longwall system order sold into the U.S., offset by a $110.4 million decrease in aftermarket bookings. Original equipment bookings decreased in all regions except for North America and Africa, and aftermarket orders decreased in all regions except Africa. Compared to the prior year second quarter, bookings in the second quarter of 2013 included a $44.1 million unfavorable effect of foreign currency translation.
Net sales in the first six months of 2013 were $2.5 billion, compared to $2.7 billion in the first six months of 2012. The 6.2% decrease in net sales in the first six months of the current year included a $102.8 million decrease in original equipment sales and a $64.2 million decrease in aftermarket sales. Original equipment and aftermarket shipments were lower in North America, Eurasia, and China. Compared to the first six months of the prior year, net sales in the first six months of 2013 included a $16.9 million unfavorable effect of foreign currency translation.
Operating income in the first six months of 2013 was $499.8 million, compared to $547.2 million in the first six months of 2012. The 8.7% decrease in operating income in the first six months of the current year is due to lower sales volumes, partially offset by favorable product mix, decreased period costs and lower product development, selling and administrative expenses. Restructuring activities continued in the first six months of the year to align the company's cost structure with anticipated demand.
Income from continuing operations attributable to Joy Global Inc. was $323.9 million, or $3.02 per diluted share, in the first six months of 2013, compared to $360.3 million, or $3.37 per diluted share, in the first six months of 2012. Bookings in the first six months of 2013 were $2.2 billion, compared to $2.7 billion in the first six months of 2012. The 19.2% decrease in bookings in the first six months of the current year includes a $237.3 million decrease in original equipment sales and a $274.5 million decrease in aftermarket sales. Original equipment bookings were lower in South America, Africa, and Australia, and aftermarket bookings were lower in all regions. Compared to the first six months of the prior year, bookings in the first six months of 2013 included a $49.6 million unfavorable effect of foreign currency translation.


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Market Outlook
A sluggish recovery in the U.S., lingering economic contraction in the Eurozone, and weaker than expected recovery in China continue to slow the growth of global commodity demand. These trends have been characteristic of the market for the past several quarters and are reflected in our incoming order rate over that same period. That order rate has been relatively stable, but we wait for a catalyst to accelerate demand.
The U.S. coal market was the first to correct. Those corrections are mostly completed, and demand for coal-fueled power generation is improving. Fuel switching has reversed from natural gas to coal and U.S. electricity generation is now relying on coal for a higher amount of its fuel supply. As a result, coal demand increased for the first time since 2011, with demand up compared to last year in each of the last five moths. Although the Powder River Basin was the main benefactor, most of the incremental coal burn will come from the Illinois Basin and Northern Appalachia as switching moves east to power plants that are already burning bituminous coal. Total power sector demand for coal is expected to rise this year and in 2014. Production increases will lag due to stockpile depletion and lower export volumes. Coal stockpiles are expected to return to normal levels by year end. U.S. exports are running ahead of last year, but should moderate in the second half. Exports will be down from last year, but still at a historically high level.
China's economy has not been able to get traction, and continued slowing has reduced the demand for coal. Electricity demand is growing at only half the rate of prior years, reflecting a significant deceleration in the economy. The growth rate of coal demand is expected to slow compared to the average growth rate over the last five years. Compounding this, domestic production continued to increase and has created high levels of stockpiled coal. Maintenance on the rail system to the port of Qinhuangdao limited domestic shipments and opened the door to imports in the first quarter, which were at record levels. The rail line has since reopened, and imports are expected to normalize and provide some relief to domestic supply. However, excess capacity in both the China domestic market and the seaborne market will have to compete for lower demand growth in China. Spot prices at Newcastle have stayed consistent, and China domestic prices are down this year. Both are below the industry's marginal cost, and some capacity will have to come off line to balance the market.
India's coal imports increased during their 2012/2013 financial year that ended in March. With limited ability to increase domestic production, India will continue to look to imports. A significant amount of imports are expected to fuel the growth in power generation in coastal areas.
Shifting to other commodities, steel production was up in the first calendar quarter, with most of that growth coming from China, which offset the contraction in most other markets. In addition, excess capacity globally is preventing steel makers from increasing prices. In response, producers are focused on reducing input costs, which is continuing to pressure metallurgical coal prices. It is estimated that almost half of global metallurgical coal production is unprofitable at current price levels, which should force a reduction in supply. Iron ore is better off because of the high concentration of seaborne supply at the low end of the marginal cost curve. China is at the other end of the cost curve and serves as a swing supplier, keeping iron ore pricing range bound.
Copper has the best fundamentals of the mined commodities. Although new capacity is coming on line and Chile production is back after labor strikes last year, production increases will continue to be offset by supply disruptions. Two recent outages at major mines are just another example. Copper exchange stocks are up to their highest levels in ten years, but this includes an unusually high amount of copper moved from private stocks into exchange inventories. Copper inventories are at more reasonable levels when considering both exchange and private inventories. As a result, copper continues to be the preferred commodity for investment, and it continues to lead our prospect list.
In summary, mined commodities are generally in supply surplus. Corrections on the supply side have largely been taken, and now the demand must improve enough to utilize the excess capacity and move prices to incentive levels. Until then, miners will continue to be selective in deploying capital expenditures on mine expansion projects.
Company Outlook
Current market conditions are affecting both original equipment and aftermarket order streams. Commodity prices are being driven by the cost of production in all key markets, and this has materially reduced customer cash flow. For example, most coal mines in the U.S. and many coal mines in Australia are operating above cash costs but below total costs. In addition, the long term expectation for commodity prices has been lowered and it limits the number of mine expansion projects that can meet updated risk-adjusted return criteria. The combination has significantly reduced customer capital expenditure spending. We expect customers to continue to deploy capital expenditures for mining equipment on a selective basis. They will do so to rebalance their mine portfolio by adding assets that have quick returns and which will operate low on the global cost curve. Even if prices are not at incentive levels, miners are adding high quality assets as they close older and higher cost mines to lower


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the operating cost across their portfolio. This is consistent with recent events in the U.S. coal market, and we expect this to play out at a more measured pace in global markets.
The prospect list of major projects that we track has declined from 2012 levels, and has stabilized over the recent few quarters. That stabilization is the result of the winding down of project re-evaluations partially offset by new projects being added. To the extent that the new projects meet more recent return thresholds, they are highly likely to proceed. We expect to see major projects coming to equipment selection in a frequency that is consistent with that seen over the past four to five quarters. As such, we can expect major project bookings in most, but not all quarters.
Aftermarket orders improved sequentially, recovering some of the first quarter's decline. The second quarter included improvement in the U.S. underground coal market, which was up sequentially after stabilizing last quarter. It has taken the U.S. underground business five quarters to adjust, stabilize and start to recover. However, the aftermarket recovery in the current quarter indicates that the correction could occur somewhat faster in the international markets. Over the longer term, we see further aftermarket upside from increased parts and services as machines we delivered in the 2010 through 2012 timeframe move into a period of higher parts consumption and scheduled rebuilds.
Our total order outlook includes the addition of new mine capacity on a selective basis partially offset by continued closures of higher cost mines nearing the end of their productive lives. Aftermarket orders should continue steadily improving to again reach their 2012 levels. Revenues at IMM have stabilized, despite the effect of Lunar New Year, and we expect continued improvement over the remainder of this year. On balance, we expect order rates to remain in the range we have experienced for the past several quarters. Any significant order rate improvement will come from an extended period of demand growth that eliminates commodity supply surpluses and supports price increases to incentive levels. We do not currently see a catalyst for this. Encouraging signs in many areas of the economy have not yet translated to the industrial sector, which is the primary source of commodity demand.
Our shipping rates have exceeded new order booking rates as we deplete backlog to meet promised delivery dates, but our ability to continue this is limited. As a result, we continue to make lowering our cost base a priority.

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