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JOY > SEC Filings for JOY > Form 10-Q on 30-Aug-2013All Recent SEC Filings

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Form 10-Q for JOY GLOBAL INC


30-Aug-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 third quarter of 2013 were $1.3 billion, compared to $1.4 billion in the third quarter of 2012. The 4.9% decrease in net sales in the current year third quarter included a $51.2 million decrease in original equipment sales and a $16.9 million decrease in aftermarket sales. Original equipment shipments decreased in North America, Eurasia, and Australia, and aftermarket sales were lower in all regions except China and South America. Compared to the prior year third quarter, net sales in the third quarter of 2013 included a $28.3 million unfavorable effect of foreign currency translation, due primarily to the decline in the value of the Australian dollar and South African rand relative to the U.S. dollar.
Operating income in the third quarter of 2013 was $274.3 million or 20.8% or net sales, compared to $299.5 million or 21.6% of net sales in the third quarter of 2012. The 8.4% decrease in operating income in the current year third quarter is due to lower sales volumes and unfavorable product mix, partially offset by decreased period costs and lower product development, selling and administrative expenses. Restructuring activities continued in the quarter to align our cost structure with anticipated demand and we will continue to review our manufacturing footprint and our brand portfolio.
Income from continuing operations attributable to Joy Global Inc. was $183.2 million, or $1.71 per diluted share, in the third quarter of 2013, compared to $194.3 million, or $1.82 per diluted share, in the third quarter of 2012. Bookings in the third quarter of 2013 were $695.4 million, compared to $1.1 billion in the third quarter of 2012. The 35.9% decrease in bookings in the current year third quarter is made up of a $297.6 million decrease in original equipment bookings, and a $91.3 million decrease in aftermarket bookings. Original equipment bookings decreased in all regions except China, and aftermarket orders were lower in Australia, China, and South America. Compared to the prior year third quarter, bookings in the third quarter of 2013 included a $90.5 million unfavorable effect of foreign currency translation, due primarily to the adjustment of beginning backlog for exchange rate movements during the quarter. The foreign exchange impact on beginning backlog was primarily due to the large amount of backlog currently denominated in Australian dollars.
Net sales in the first nine months of 2013 were $3.8 billion, compared to $4.1 billion in the first nine months of 2012. The 5.8% decrease in net sales in the first nine months of the current year included a $154.0 million decrease in original equipment sales and a $81.0 million decrease in aftermarket sales. Original equipment shipments decreased in North America, Eurasia, and China, and aftermarket sales were lower in all regions except China and South America. Compared to the first nine months of the prior year, net sales in the first nine months of 2013 included a $45.3 million unfavorable effect of foreign currency translation, due primarily to the decline in the value of the Australian dollar and South African rand relative to the U.S. dollar.
Operating income in the first nine months of 2013 was $774.1 million or 20.2% of net sales, compared to $846.7 million or 20.8% of net sales in the first nine months of 2012. The 8.6% decrease in operating income in the first nine months of the current year is due to lower sales volumes, unfavorable product mix, and lower other income primarily due to the prior year gain on the re-measurement of our interest in IMM upon obtaining a controlling interest in December 2011. These declines in operating income were partially offset by decreased period costs and lower product development, selling and administrative expenses. Restructuring activities continued during the first nine months of the current year to align our cost structure with anticipated demand and we will continue to review our manufacturing footprint and our brand portfolio.


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Income from continuing operations attributable to Joy Global Inc. was $507.1 million, or $4.73 per diluted share, in the first nine months of 2013, compared to $554.7 million, or $5.19 per diluted share, in the first nine months of 2012. Bookings in the first nine months of 2013 were $2.8 billion, compared to $3.7 billion in the first nine months of 2012. The 24.0% decrease in bookings in the first nine months of the current year includes a $556.3 million decrease in original equipment bookings and a $344.4 million decrease in aftermarket bookings. Original equipment bookings decreased in all regions except for Eurasia and China, and aftermarket bookings were lower in all regions. Compared to the first nine months of the prior year, bookings in the first nine months of 2013 included a $139.8 million unfavorable effect of foreign currency translation, due primarily to the adjustment of beginning backlog for exchange rate movements. The foreign exchange impact on beginning backlog was primarily due to the large amount of backlog currently denominated in Australian dollars. Market Outlook
Most mined commodities are in or near supply surplus for the first time in over a decade. This is primarily the result of post-recession economic recovery falling short of expectations. The Eurozone is just starting to recover from a multi-year recession, China growth has slowed and growth in the U.S. remains sluggish. This surplus has moved commodity pricing down from incentive levels into the marginal cost curve. Prices for industrial metals and bulk commodities have declined over the last 18 months. Seaborne coal prices have declined since the beginning of the year, and China domestic coal prices have fallen. Lower pricing is making higher cost mines uneconomic and will result in closures that will rebalance the market. Until this happens, there is little incentive to invest in new mine capacity.
Oversupply in the seaborne thermal coal market has undermined domestic prices and has led to increases in Chinese coal imports from last year despite ample domestic supply. Imports are increasing even as China domestic production is down year-to-date, and, as a result, coal stockpiles remain higher than normal in key domestic producing regions. This continues to indicate that a significant portion of China thermal coal production has a higher cost and is not economic at today's pricing. This will support continued coal imports and will increase the pressure on domestic producers to consolidate and mechanize as a proven path to reducing unit cost.
Through the first two months of the 2013/2014 financial year, Indian coal imports increased from a year ago. With a limited track record of increasing domestic production, India is expected to see full-year imports increase to meet growing demand. A significant amount of India's new power generating capacity will be coal fueled, and these plants are primarily being built in the coastal areas to access seaborne coal markets.
During the first half of 2013, coal burn for power generation in the U.S. has increased, and stockpiles have been reduced. Stockpile depletion will continue in the second half of the year and should reach a normalized level by year end. This should set the stage for coal delivery increases in 2014. Even after adjusting for lower expected exports, this should result in coal production increases in 2014.
Global steel production has increased in the first half of 2013, with almost all of that increase from China. There is excess steelmaking capacity globally, with most of that in China and Europe. This has limited steel pricing, but volumes have continued to support demand for iron ore and metallurgical coal. Iron ore prices have held up better because of highly concentrated high-grade supply. In fact, current pricing continues to support investment in capacity expansion, but only in high-grade, low cost regions. Metallurgical coal production is more fragmented with less price support, but pricing has finally started to stabilize after declining for most of this year. Stockpiles of both iron ore and metallurgical coal are at low levels, setting the stage for restocking and price support in the second half of the calendar year.
Copper continues to have the best fundamentals of the mined commodities. Since reaching record highs in June, global inventories have declined and prices have rebounded. Additionally, inventories at bonded warehouses have declined since the first quarter. These developments are supporting continued investment in mine capacity expansion.
Our customers' declining cash flows have resulted in significantly reduced capital expenditure budgets. Customer capital expenditures are expected to remain at this level until demand improves enough to move commodity pricing above marginal cost and toward incentive levels. While there are a number of high grade projects in process, some later stage projects have been slowed so that they do not get ahead of the market. Company Outlook
The conditions in our end markets are dominated by supply surplus and reduced demand growth for most commodities. This is forcing mines with higher production costs to close in order to rebalance the market. Our customers continue to move forward with a select number of expansion projects, which will come online with costs low on the global cost curve. Even so, customers


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remain cautious, especially regarding timing. A couple of projects have recently announced delays of six months, and others are experiencing slippage quarter to quarter. Our project tracking list has increased this quarter as our customers continue to set their longer term priorities. However, the list is back-end loaded, and project slippage has become common under current market conditions. This means that improvement in the prospect list is not expected have a major impact on our 2014 order rate. This is consistent with our view that the market will continue to be more challenging before it starts to improve. Our aftermarket will continue to see headwinds as mines are taken out of production and volumes decline to balance the market. The U.S. coal sector has gone through that correction, and it took four to five quarters to adjust down, stabilize and start to recover. U.S. parts volumes are now on an improving trend and rebuilds are coming back into scope. That correction process has moved to Australia and China as customers in these regions deal with supply surplus domestically and in the seaborne markets. We believe that Australia is midway through its correction and China is in the early stages. The downside of these corrections includes reducing parts inventories held by customers at mine sites and extending the time between rebuilds. This results in an early over-correction that is then normalized. The impact of this rolling correction is expected to last through most of next year. Not all regional markets are expected to be affected, but the correction in some of our largest markets will not be fully offset by aftermarket growth in other regions in the near term. Our shipments in fiscal 2013 have remained above incoming order rates as we continue to make our delivery commitments to our customers. However, we are nearing the end of backlog depletion capability.
We have historically demonstrated our ability to generate strong cash flows though the cycle. In addition, we have more than sufficient growth capacity in place, and therefore our capital expenditure spend will continue to decline. Our U.S. pensions are nearing fully funded status, and this will allow us to reduce pension funding. Therefore, our Board of Directors has authorized us to repurchase up to $1.0 billion of our shares over the next three years.

Results of Operations
Quarter Ended July 26, 2013 Compared With Quarter Ended July 27, 2012 Net Sales
The following table sets forth the combined net sales included in our Condensed Consolidated Statements of Income.

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