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JOY > SEC Filings for JOY > Form 10-Q on 7-Mar-2014All Recent SEC Filings

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Form 10-Q for JOY GLOBAL INC


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 otherwise 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 parts and perform 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 and Surface. 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 first quarter of fiscal 2014 were $839.3 million, compared to $1.1 billion in the first quarter of fiscal 2013. The 27.0% decrease in net sales in the current year first quarter included a $257.6 million decrease in original equipment sales and a $53.0 million decrease in service sales. The decrease in sales was driven by weak market conditions. Original equipment sales decreased in all regions. Service sales decreased in South America, Australia and China by $4.2 million, $35.1 million and $34.4 million, respectively, with increases in all other regions. Compared to the prior year first quarter, net sales in the first quarter of fiscal 2014 included a $33.8 million unfavorable effect of foreign currency translation.
Operating income in the first quarter of fiscal 2014 was $85.2 million, or 10.2% of net sales, compared to $221.2 million, or 19.2% of net sales, in the first quarter of fiscal 2013. The 61.5% decrease in operating income in the current year first quarter was impacted by $105.8 million due to lower sales volumes, $7.8 million due to less favorable product mix, $13.6 million due to less favorable manufacturing cost absorption and $14.5 million due to higher period costs, which included a $3.8 million gain from the true-up of first year excess purchase accounting changes in fiscal 2013. These items were partially offset by a decrease in product development, selling and administrative expenses of $4.3 million, which included a $1.1 million increase in restructuring charges partially offset by a $0.2 million decrease in acquisition costs, and a $1.4 million increase in other income. Compared to the prior year first quarter, operating income in the first quarter of fiscal 2014 included a $6.1 million unfavorable effect of foreign currency translation.
Income from continuing operations was $48.9 million, or $0.48 per diluted share, in the first quarter of 2014, compared to $142.1 million, or $1.33 per diluted share, in the first quarter of 2013.
Bookings in the first quarter of fiscal 2014 were $860.5 million, compared to $1.0 billion in the first quarter of fiscal 2013. The 16.0% decrease in bookings in the current year first quarter is made up of a decrease of $186.0 million, or 42.7%, in original equipment bookings and an increase of $21.9 million, or 3.7%, in service orders. The decrease in bookings was driven by weak market conditions. Original equipment bookings decreased in all regions except South America, which increased by $1.1 million. Service orders increased in North America, South America and Eurasia by $5.5 million, $25.6 million and $11.0 million, respectively, with decreases in all other regions. Compared to the prior year first quarter, bookings in the first quarter of fiscal 2014 included a $61.6 million unfavorable effect of foreign currency translation. Market Outlook
Forecasts for 2014 project global growth to be high, and the Eurozone is expected to see positive growth. At the same time, the Chinese economy has continued to show signs of stabilization and growth is expected to be approximately even with 2013. However, despite improving global economic conditions, most major commodities remain oversupplied with pricing well below peak levels.
U.S. coal market fundamentals continued to improve through the end of the year and are set to strengthen in 2014. After falling in 2013, U.S. coal production is expected to rebound this year. The continued normalization of utility inventories, as well as the recent weather driven spike that has pushed natural gas prices up, should drive an increase in coal consumption in the electric power sector. Given increased power demand and the expectation for natural gas prices to remain high, the Powder River Basin and Illinois Basin are expected to see production growth in 2014.

Table of Contents

Seaborne thermal coal markets will also benefit from improving global economic conditions in 2014 as demand is expected to grow, with most of this growth coming from China and India. Despite steady demand, seaborne supply increases from Australia, Indonesia and Colombia are expected to more than keep pace leaving the market well supplied and prices range bound.
The Chinese domestic coal market continues to consolidate as smaller mines are merged with large producers and unsafe mines are closed. These changes will require new solutions and technological advances to maximize production against a backdrop of weak prices. While Chinese coal demand growth will slow this year, imports should slightly surpass 2013 levels.
Global steel production is expected to grow during 2014 as demand remains solid. However, excess production capacity is expected to keep prices in check with continued pressure on steel making inputs, particularly metallurgical coal. Despite seaborne met coal demand growth expected in 2014, recent quarterly contract prices were settled at the lowest level since the 2009 annual contract was set. Significant oversupply remains an issue and further high-cost capacity will need to be curtailed in 2014 to help balance the market. Iron ore prices remain tied to steel production. Iron ore prices have trended lower in recent weeks as signs that the Chinese restocking cycle has reached completion. Global copper markets finished 2013 with a smaller deficit than in previous years and are expected to see a marginal surplus in 2014 as new supply comes on line. However, global inventories have declined from 2013 highs and combined with the expected increase in demand should support stable prices. These conditions should continue to make copper an attractive investment and this is supported by ongoing prospect activity for new copper equipment. Company Outlook
While the economic outlook is improving and should provide some demand catalyst, commodity oversupply and a depressed pricing environment are straining miner cash flows and slowing capital expenditures. Commodity prices remain range bound and in some cases below marginal costs requiring further supply curtailments to balance the market. While these conditions make it difficult to predict the exact timing, the ability to delay rebuilds and service on equipment in most regions appears to be nearing a conclusion. Our service bookings in the first quarter increased year-over-year for the first time since the third quarter of 2012. As demand for commodities improves and supply cuts take hold, we expect our service business to follow the general increase in global commodity production.
In China, we continue to focus on our local China products incorporating Underground technology and developing superior products against local competitive equipment. We are also leveraging our China supply chain in developing cost reduced products for the local China market and selective export markets.
Despite the downturn, we continue to invest in new product innovations to solve our customers' challenges. This quarter we won an order for our new high productivity low seam longwall system. This longwall system incorporates the latest features of automation contributing to higher productivity, lower cost per tonne and improved safety.
We remain committed to our long-term strategy of expanding our reach beyond coal into industrial minerals and hard rock. Our focus remains on improving our customers' productivity, lowering their operating costs, and helping them achieve zero harm and we believe that our product development and other key strategies will enable us to achieve these outcomes.

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